Scottish Mortgage Targets Unlisted Firms

By Mark McSherry

Scottish Mortgage Investment Trust’s latest results show a big increase in its stakes in companies not listed on the stock market and reveal that more than 90% of the £3.8 billion Baillie Gifford fund’s investments are outside of the UK.

Scottish Mortgage has invested in a number of unlisted firms over the past six months, including Home24, a European online furniture retailer developed by Rocket Internet; holiday accommodation firm Airbnb;  peer-to-peer small business lender Funding Circle; and online tradesmen’s services platform Thumbtack.

Other private investments made by the Baillie Gifford fund in the past year have included US cyber security and analytics company Palantir and Indian e-commerce company Flipkart.

The Scottish Mortgage fund, managed by James Anderson and Tom Slater, said 16 unlisted investments accounted for 10% of its portfolio on September 30 and that shareholders should expect both these figures to rise.

Explaining its big move into unlisted companies, Scottish Mortgage said: “The destructive short term demands of Wall Street in particular around quarterly earnings targets for public companies, combined with the lower capital requirements of many of these businesses, have contributed to this trend to raise capital in the private market, rather than through an earlier listing on a stock exchange.

“Instead, companies are seeking to partner with a relatively small number of investors who share their long term horizon. Scottish Mortgage and Baillie Gifford have developed a reputation for patient long term investing, which is a real asset in this regard.

“Further, Scottish Mortgage’s closed-end nature is particularly well suited to investing across the capital structure, as the portfolio does not have a predefined lifespan and can continue to hold its stake in a business when it chooses to list on a public market, acting as a proper long term partner and providing stability through the challenging period around any future initial public listing, to the benefit of all concerned.”

Scottish Mortgage added: “These are not immature venture capital style businesses, but established, often highly cash generative companies, typically with valuations well over US$1 billion, which would have previously been accessed through the public equity markets. Many of those within the portfolio, such as Spotify are already global brands.”

Scottish Mortgage’s biggest investments at September 30 included a £377 million stake in, £177 million in Tesla Motors, £134 million in Facebook, £120 million in Google and £105 million in Alibaba.

About 48% of Scottish Mortgage’s investments are in North America, with 18.1% in the Eurozone, 13.1% in China and 9.5% in the UK.

The net asset value (NAV) per share of Scottish Mortgage fell by 10.9% and the share price fell by 9.7% in the six months to September 30, compared to a fall in the FTSE All World Index of 11.8%.

Over the last 5 years, total return for the NAV at Scottish Mortgage was 77%, and 104% for the share price. The Index returned 48% over the same period.

Scottish Mortgage’ said demand for its stock has remained healthy and it sold more than 48 million shares, making £128 million, in the past six months.

Earnings per share were 1.23p over the six months, compared with 1.62p for the same period last year.

“This trend of lower earnings … is expected to continue,” said Scottish Mortgage. “The fall is due to the large number of companies in the portfolio, particularly in the US, which are reinvesting in their own businesses’ future growth rather than paying cash out to shareholders.  Whilst this ought to be beneficial for future capital growth and is entirely consistent with Scottish Mortgage’s own growth focus, it does affect the earnings level in the portfolio.

“The board is aware that dividends are important to a number of shareholders and the intention remains at least to maintain the dividend. An unchanged interim dividend of 1.38p will be paid.”