£6bn Baillie Gifford fund bets on healthcare, tech

Gene sequencing giant Illumina is a major investment for Scottish Mortgage

The fund managers who run Edinburgh-based Baillie Gifford’s flagship £6 billion fund, the Scottish Mortgage Investment Trust plc, are making new investments in cutting-edge healthcare companies that develop new therapies and diagnostic tools.

The closed-end fund already has a big stake in gene sequencing giant Illumina — making up 5.4% of the fund’s assets — and is now investing in other healthcare firms.

Scottish Mortgage’s net asset value per share (NAV) increased 17.5% over the first half of the company’s financial year, while its share price rose 15.4%.

The total return from investing in shares of Scottish Mortgage over the last five years to the end of September was 222.8%, compared to the FTSE All-World Index’s total return of 101.6%.

Baillie Gifford has about £173 billion of funds under management and advice.

In commentary that accompanies its results for the six months to September 30, 2017, Scottish Mortgage said: “Looking out over the coming years, the managers believe that we are on the cusp of a step change in healthcare through the development of personalised diagnostics and therapeutics.

“This will come from improvements in our understanding of genomics, primarily through large scale population studies which were previously not viable on cost and data processing capacity grounds.

“Dominant gene sequencing giant, Illumina, remains at the forefront of lowering sequencing costs to expand the use of this technology.

“This is still a large holding in the portfolio and the managers have been making further investments in companies developing such new therapies and diagnostic tools.”

Scottish Mortgage also said its fund managers “have relentlessly focused on” investing in companies that embraced the changes brought about by the iPhone and smart mobile devices.

“This digital arena has come to be dominated by just six companies, three in China: Alibaba, Tencent and Baidu, and three in the US: Amazon, Facebook and Alphabet,” said the fund.

Those six companies are among the biggest investments of Scottish Mortgage, which holds stakes in around 75 companies.

Nonetheless, Scottish Mortgage said: “The managers have been considering the future prospects for all six of these companies, asking if they still have the potential to become a multiple of their current size.

“There has also been discussion of the regulatory risk for the US companies, although this is not a new challenge for these businesses and has featured in the investment analysis for some time now.

“These companies need to be viewed as good corporate citizens in the eyes of their users and customers. Amazon has perhaps been the most thoughtful and made the most progress in this regard.”

Scottish Mortgage is also heavily invested in private companies, including Spotify and Airbnb.

“These are truly global businesses, significantly impacting their large publicly-listed competitors, but as yet, they remain private companies,” said the fund of the private company investments.

“This makes it hard for most investors (professional or individual) to benefit from the capital creation from their growth.

“The ability to invest in such businesses on a global basis is an important differentiator for Scottish Mortgage and has been much discussed in the pages of the company’s reports over the last few years.

“The board and managers believe this will continue to be the case in the future.

“The managers continued to make new investments in private companies and have added to a number of the existing holdings (including Spotify) over the period.

“Despite this activity, the level of such holdings within the overall portfolio has remained broadly consistent at around 13%.

“This is simply due to the relative strength of the performance of a number of the largest holdings, particularly those noted above, increasing the company’s total assets.”