Scottish Mortgage Investment Trust: June 2024 update

• The managers hunt for private and public companies with high-growth potential

• Tom Slater has been involved in managing the trust for almost 15 years and is supported by deputy manager Lawrence Burns who joined him in March 2021

• Long-term performance has been strong, but it has been a bumpy ride

How it fits in a portfolio

Scottish Mortgage Investment Trust is managed by Baillie Gifford. It aims for long-term growth by investing in some of the stock market’s most exciting companies. From healthcare to transportation, the trust provides exposure to some of the most disruptive businesses around the world. This includes both public and higher-risk private companies. With a focus on growth, the trust could work well alongside others investing in out-of-favour ‘value’ companies to form part of an adventurous investment portfolio. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to Net Asset Value (NAV).

Manager

James Anderson, the long-standing manager of this trust since 2000, stepped down and retired at the end of April 2022. Baillie Gifford takes succession planning seriously, especially as Anderson was integral to the trust’s development and performance over the past two decades.

Tom Slater is a partner at Baillie Gifford and lead manager of the trust. He was joint manager alongside Anderson from 2015 after spending five years as deputy manager. He joined Baillie Gifford in 2000 and has spent time analysing both Asian and UK companies. He’s also Head of North American Equities and manages other global and US portfolios, including the Baillie Gifford American Fund. Given there is regional overlap and a shared investment philosophy across these strategies, we believe Slater can devote enough time to each.

Lawrence Burns was appointed deputy manager in March 2021 and continues to support Slater following Anderson’s retirement. He joined the firm in 2009 and has experience covering the UK, emerging markets, and managing global growth portfolios. He’s also a partner at Baillie Gifford.

The team also benefit from the wider resource available at Baillie Gifford, which consists of over 100 investment professionals.

Process

The managers believe that markets are driven by extreme events and success, which propels society forward. Their research suggests that only a handful of companies generate wealth over the longer-term and these are the ones they seek to invest in. The trust is invested in a way that means it looks very different from the index and peers.

New ideas are generated from a wide range of sources such as industry specialists, roadshows and the expertise of colleagues at Baillie Gifford. The team then conduct detailed research into each potential company – they spend a lot of time building a deep understanding of a company’s business model, its quality of management and the growth potential of the industry they operate in. Typically, these are financially robust companies that have hard-to-replicate advantages over competitors. The managers are optimists and focus on what could go right and, if successful, how big could the opportunity be.

The managers are true long-term investors as they believe it’s the best way to capture the potential growth of the companies they invest in. At the end of April 2024, the trust is invested in 98 companies, nine of which have been held for over ten years, including technology firm Amazon, semiconductor firm ASML and electric car manufacturer Tesla.

This patient approach is well suited to investing in private companies (those not listed on the stock market). The trust can invest up to 30% of its assets in these unquoted companies (measured at the time of investment). Investors should be aware that investment in unquoted companies is higher risk and they can be considerably less liquid (more difficult to buy and sell) than those traded on established stock exchanges. At the end of April 2024, there were 53 unlisted investments the same amount as the previous year. However, it now makes up 27.1% of the trust’s assets. This has reduced slightly from 29.9% last year. The trust’s public companies have performed well over the year which has led to a reduction of overall weighting of private companies.

55.7% of the trust is invested in North America, with the remainder split across Europe and higher-risk emerging markets. The managers view the trust’s sector allocation differently to most others, and in a way that expresses their view of the world. ‘Transformational Healthcare’ is the largest theme and is home to the likes of drug discovery firm Moderna. Other notable themes include, ‘Changing Media Habits’ and ‘Evolution of Transportation’. All have qualities in common, including the ability to cause dramatic change and disrupt the status quo.

New investments this year include US social media and advertising platform Meta (Facebook), Korean e-commerce company Coupang, US healthcare company Insulet and Singapore game developer Sea Ltd. Slater also invested in AI powered online healthcare and wellness company Oddity’s initial public offering (IPO - the first time a company lists on the stock market). The trust also invested in the company prior to this when it was private.

To pay for new investments, the manager sold a number of companies over the last 12 months. This included a long-standing investment in gene sequencing company Illumina which was sold after poor execution from the management team – the managers believe the work required to increase customer demand and lower costs will be challenging for some time. The trust does still have exposure to gene sequencing through an investment in Tempus.

During the trust's financial year to the end of March 2024 another long-term investment was significantly reduced, Chinese mobile platform company Tencent. It has been a staple in the trust for 15 years. Given the political and regulatory environment in China, Slater believes it will be difficult for the company to continue its growth therefore it was reduced in favour of better opportunities. Since the end of the trust’s financial year, the company has now been sold completely.

The managers can use gearing (borrowing to invest), which can boost gains but also increases losses, so is a higher-risk approach. As at the end of April 2024 the gearing stood at 13%, which is lower than the previous year when gearing was 17%. They can invest in derivatives too, which if used also adds risk.

Culture

Scottish Mortgage was established in 1909 and is a member of the FTSE 100 index, home to the biggest companies in the UK stock market. The trust is managed by Baillie Gifford, an independent private partnership founded in 1908. It's owned by its partners, who work full time at the firm. This ownership structure means senior managers have a vested interest in the company, and its funds and investment trusts, performing well. We think this has helped cultivate a culture with a long-term focus, where investors' interests are at the centre of decision making. We also like that fund managers are incentivised in a way that aligns their interests with those of long-term investors and should retain talented managers.

ESG integration

All of Baillie Gifford’s funds are run with a long-term investment horizon in mind – they see themselves as long-term owners of a business, not short-term renters. So, assessing whether society will support, or at the very least, tolerate, the business model over the long term, and whether management will act as good stewards of shareholders’ capital is an important part of the investment process.

Dedicated ESG (Environmental, Social and Governance) analysts sit with and report into their respective investment teams, and the firm’s ESG efforts are supported by a dedicated climate specialist team, an ESG Services team (responsible for voting operations and ESG data) and an ESG Client team (responsible for ESG-related client communications). Individual investment teams are responsible for voting and engagement for the companies they invest in. Investment in controversial weapons is prohibited across the firm.

The firm reports all its voting decisions and provides rationale in situations where it voted against management or abstained, in a detailed quarterly voting report. There is also a quarterly engagement report which details the companies engaged with, and the topic discussed, and further engagement case studies are available on the website. All this information is brought together in the firm’s annual Stewardship Activities report.

We are comfortable that ESG risks are considered suitably at Baillie Gifford. However, this trust does not have a specific ESG or responsible investing remit, meaning that it has the option to invest in companies that are considered ESG sinners.

Cost

The trust’s ongoing charge is 0.35%, which is slightly more than 0.34% for the previous financial year. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA, the HL platform charge of 0.45% (capped at £200 per annum for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account or a Junior ISA.

Investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

Since Slater was appointed co-manager in January 2015 to the end of May 2024, the trust has performed better then the average global investment trust. Over this period the share price has grown 274.41%* vs 141.61% for the AIC Global sector average. During the same time the trust’s NAV has increased 305.20%. Past performance is not a guide to the future though and investments fall as well as rise so you could get back less than you invest.

Over the trust’s latest financial year to the end of March 2024 the trust outperformed the AIC Global sector average of 19.96%, with a return of 32.52%. During the same period the trust’s NAV increased 11.37%.

US semiconductor company Nvidia was the biggest contributor to performance. Demand for Nvidia’s chips have exceeded expectations and they’ve been a key driver of the progress that has been made in AI. So has ASML, the Dutch manufacturer of the equipment needed to produce cutting-edge semiconductors. This was another key contributor to performance. US technology giant Amazon also performed well. After a period of rising costs ended there has been a greater focus on efficiency. Amazon could also benefit from the developments in AI.

There were also some companies that didn’t perform as well. US healthcare company Moderna was the largest detractor. Demand was below expectations for their Covid-19 vaccination and has been a big headwind for the company. French luxury goods company Kering and Chinese local services company Meituan also struggled over the 12 months.

We believe the trust has long-term performance potential, but periods of volatility should be expected. As always, we suggest investors build diversified portfolios with exposure to a variety of investment styles, sectors, countries, and asset classes. Plus, you should regularly review your investments to make sure they continue to meet your needs and objectives.

At the time of writing the trust trades at a 7.91% discount to NAV. During 2023 the trust traded on an average discount of 13.52% and over the last 10 years a discount of 1.97%.

In March this year the trust’s board of directors announced it would buyback at least £1billion worth of shares over the next two years. A trust’s board may decide to buy back shares to try to move the share price closer to the trust’s NAV. This is the largest share buyback programme ever done in the investment trust sector.