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Scottish Mortgage defends strategy after shares take beating

Baillie Gifford’s Scottish Mortgage Investment Trust has urged shareholders to remain “disciplined and patient” as it defended its investment approach after a “painful” year in which its shares have dropped by a third.

The trust’s strategy is to identify high-growth companies, such as vaccine-maker Moderna, semiconductor-maker ASML and Elon Musk’s Tesla, which will transform society. These stocks have sold off over the past year as the US Federal Reserve and other central banks aggressively raised interest rates to fight inflation.

Tom Slater, who co-manages the £11.5bn trust with Lawrence Burns, said in its full-year results on Wednesday that the “accelerating pace of change throughout the economy . . . has not translated into our investment results lately, but we need to remain disciplined and patient”.

Slater, Burns and Fiona McBain, chair of the 114-year-old trust, were communicating to shareholders for the first time since a high-profile boardroom bust-up at Scottish Mortgage two months ago.

Amar Bhidé, an academic and one of its directors, stepped down following a blistering attack on a raft of concerns, including about the trust’s investments in unlisted companies and how the board manages its discount.

Burns defended Scottish Mortgage’s strategy of investing in private companies, which it began over a decade ago in 2012. He said that by doing this it had given its shareholders low-cost access to companies including European battery maker Northvolt and SpaceX, “many of which have no public market equivalent”, and received “a lens into the future” as companies were staying private for longer.

Scottish Mortgage’s five largest private holdings alone account for nearly half of its private company exposure with the 10 largest accounting for nearly two-thirds, said Burns: “The companies that make up the bulk of our private company exposure are consequently neither small nor early-stage.”

The decline in technology stocks over the past year is yet to be fully reflected in the private markets, prompting investor fears that a reckoning in the private sphere is still to come.

Burns defended the trust’s “robust valuations process” for private companies, and said that last year 532 revaluations were made with 84 per cent of the private instruments held revalued five times or more. The result of this was that in aggregate the trust’s private company valuations were written down by 28 per cent, compared with a fall in the Nasdaq of 14 per cent.

Over the course of the financial year, Scottish Mortgage deployed £281mn into private companies. Burns warned that there was “a material change in the funding environment . . . from a period of capital abundance to one of capital scarcity”.

He cautioned that “it is likely that a few of our smaller private company holdings may find themselves casualties of this new environment. Should this happen we expect the impact to represent only a small percentage of the portfolio’s assets.”

Last year, turnover in the portfolio was low. Slater said that the only sale from its top 30 positions was Chinese tech giant Alibaba, which it had bought in 2012 when the company was still private. Alibaba was one of several Chinese holdings that were slashed last year, “driven by concerns about the growth of big online platform companies in China after several regulatory interventions, as well as reflecting disquiet about deteriorating Sino-US relations”, he wrote.

Scottish Mortgage also “substantially reduced” its holding in sequencing machine company Illumina. While the manager “still believes gene-sequencing is a fundamental building-block for advances in healthcare . . . the company’s execution has been disappointing”. 

In the past year, the trust bought a new holding in gaming company Roblox, took a position in cloud networking-provider Cloudflare, and added to its holding in Latin American ecommerce and finance company, MercadoLibre.

Against a backdrop of market anxiety around growth and private company investing, last year Scottish Mortgage moved from trading at a discount to net asset value of 0.5 per cent to a discount of 19.6 per cent.

McBain, who is retiring as chair and will be replaced by senior independent director Justin Dowley, acknowledged that “such moves can be discomforting for shareholders”. Last year the trust bought back £283.3mn of shares.

Over the past 10 years, Scottish Mortgage’s net asset value per share has increased by 432 per cent compared with a 181 per cent increase in the FTSE All-World index.

The board of directors is recommending that this year the total dividend be increased by 14.2 per cent to 4.10 pence per share. Slater said that the managers remained excited about the long-term opportunities in areas including renewable energy, mRNA-based medicines and artificial intelligence.

He said: ‘It is by investing in the agents of change and partnering to develop big new opportunities, that exceptional returns for shareholders will be generated.”

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