Is Scottish Mortgage the next big success story?

It’s been a roller coaster ride for shareholders of the Scottish Mortgage Investment Trust (LSE: SMT), the £11billion giant of the investment-trust sector. 

The share price trebled to £15 in the two years to late 2021, then fell by 60% to a low of £6 in the next 18 months. It then climbed back to more than £8 at the end of 2023, before slipping to 750p in January. The price went from a premium to net asset value (NAV) to a 20% discount but now trades at an 11% discount. 

Investors swung from adulation of its focused portfolio of high-growth listed and unlisted stocks (the top-ten holdings account for 45% of the portfolio, 30% of which is unlisted) to deep scepticism. But they now appear to be shifting back to optimism again.

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Winterflood Securities rates the shares a “buy” and includes SMT in its tips for 2024. 

“The managers have displayed a sensible focus on a range of structural growth trends... Moreover, the private-equity allocation has been used to good effect in gaining access to positions that competing funds simply cannot offer,” writes Shavar Halberstadt. 

Inevitably, the share prices of listed holdings are volatile. By mid-January, Nvidia, the fourth-largest holding at 5.1% of the portfolio, had risen by 14% on strong results, while Tesla, the sixth-largest holding at 4.5%, was down by 11.5% as demand for electric vehicles appears to be weakening. 

Potential buyers are concerned about obsolescence resulting in poor second-hand values, as the technology is fast improving and infrastructure has not kept pace with demand. 

These should be temporary problems. The confidence of the managers, Tom Slater and Lawrence Burns has not faltered. They accept there have been mistakes and some investments haven’t worked out, but the Baillie Gifford thesis is that a few big winners will always compensate for the disappointments. 

A sliding share price does not necessarily correspond with a disappointing outlook. For example, the stock of Moderna, 4.4% of the portfolio, has fallen from $450 in late 2021 to $102 as demand for its Covid vaccine has disappeared. 

The vaccine emerged from its mRNA platform, of which it was an unexpected by-product. “In the next five years,” says CEO Stéphane Bancel, “people will have forgotten what we did in the pandemic and know us primarily for our work in cancer care – prevention and early treatment.” 

Moderna’s appeal lies in “the breadth of what they can do with the technology”, says Tom Slater. “If you can prove that it works in one setting, it will substantially improve the chances of success in lots of other settings. There are huge areas of unmet clinical need… that their technology will be able to address.” 

Joby Aviation is a smaller holding but is bringing the dream of flying cars to reality with electric, vertical take-off aircraft that it hopes will become “the Uber of the skies”. “It’s really exciting to see this idea from science fiction become a commercial reality,” says Slater. 

“We will provide quick, safe, quiet, green transportation in many cities around the world,” says Paul Sciarra, executive chairman. 

Elon Musk’s SpaceX, 3.7% of the portfolio, has reduced the cost of rocket launches to take satellites into space by 97% through the use of reusable rockets. Its Starlink network provides high-speed global internet in otherwise inaccessible locations. Another holding, Zipline, uses drones for fast and accurate delivery to firms and consumers, while Swedish-based Northvolt (3.2%) is building “the world’s greenest batteries”. 

In the past two years, most of SMT’s investments have continued to progress, either growing revenue, developing their business base or progressing towards commercialisation. 

Investors’ sentiment may have gone from starry-eyed optimism to extreme scepticism, but none of the major holdings are short of capital. Their growing success should prove highly profitable for SMT’s shareholders.

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