Investment in Private Firms and China: The Reason Behind Scottish Mortgage's Pursuit of Remarkable Profits
The Scottish Mortgage Investment Trust (LSE: SMT), one of the most prominent investment trusts among investors, aims to "own the world's most exceptional growth companies, wherever we find them, and be long-term patient owners," according to Tom Slater, the trust's manager. Known for its long-standing history since 1909, the trust is now a constituent of the FTSE 100 and features on our portfolio of investment trusts.
In 2022, shares in the trust plunged 45% when markets turned against growth companies during the pandemic, causing some nervousness among investors. However, Slater's confidence in chasing growth may provide reassurance, despite the recent market uncertainty caused by tariffs. As he explains, investors should accept the volatility that comes with equity markets and focus on seeking returns rather than avoiding risk.
Scottish Mortgage will invest in various regions, including China, and is not deterred by investing in unicorns and private companies to find the best opportunities worldwide. The trust's main objective is to find exceptional growth companies for exceptional returns, and as Slater notes, "the best companies just happen to be private."
The trust currently holds more than half of the world's 10 most valuable unicorns. Its largest holding is Space Exploration Technologies (Space X) at 8%, and it also has significant holdings in fintech firms like Revolut and Stripe. Scottish Mortgage's strategy is to support the management teams of its holdings for the long term and increase positions in companies with growing opportunities and high odds of success.
Slater acknowledges that while active managers may sometimes get things wrong and lose money, exceptional returns can balance out losses. "We made more money in our investment in SpaceX last year than we lost in our investment in Northvolt," he says, emphasizing the importance of holding onto influential winners.
Investors should be mindful that volatility is inherent in the trust's returns due to its focus on exceptional growth companies, which may not always align perfectly with benchmark indices. However, the board has worked diligently over the past 15 or 20 years to clarify the trust's goals and reasons for owning Scottish Mortgage.
While many investors might avoid China, Slater advocates that doing so could be missing out on significant opportunities. He mentions a huge disconnect between China's massive 20% share of the world economy and its 3% share of the market, emphasizing that ignoring China could be detrimental.
Regarding AI, Scottish Mortgage sold £1.3 billion of Nvidia stock last year, demonstrating its early-stage investment strategy. Although the trust keeps an eye on AI, there are concerns about the long-term sustainability of margins, particularly as the technology needs to become more affordable for widespread adoption.
In its most recent financial results, Scottish Mortgage announced a 6% increase in its share price, and a 11.2% rise in net asset value, surpassing the FTSE All-World Index's 5.5% return. This implies a widening discount, with the investment trust sector average standing at 9.1%. The trust allocated £132 million in new capital during the year, and it has since purchased over 222 million shares through the share buyback scheme.
Upon announcing the results, Justin Dowley, Scottish Mortgage's chair, stated, "In a volatile world, resilience is a strategic advantage, allowing companies to adapt and emerge stronger." Slater highlighted the impact that generative AI has had on the trust's returns this year, with Meta and Spotify among the strongest contributors.
- Despite the recent market uncertainty caused by tariffs, the confidence of Scottish Mortgage's manager, Tom Slater, in chasing growth may provide reassurance to investors.
- Scottish Mortgage Investment Trust is not deterred by investing in unicorns and private companies to find the best opportunities worldwide, including China.
- The trust's strategy is to support the management teams of its holdings for the long term, with Space Exploration Technologies (Space X) being one of its largest holdings at 8%.
- Regarding AI, Scottish Mortgage keeps an eye on AI's potential, but there are concerns about the long-term sustainability of margins, particularly as the technology needs to become more affordable for widespread adoption.
