Scottish Mortgage falls 33%, commits to growth firms

Tom Slater and Lawrence Burns

The £13.3 billion Scottish Mortgage Investment Trust, Baillie Gifford’s flagship fund, has reiterated its commitment to investing in “exceptional growth companies” despite announcing share price and net asset value returns of -33.5% and -17.8% respectively for the year to March 31, 2023.

The trust’s benchmark, the FTSE All-World index, returned -0.9%.

Scottish Mortgage manager Tom Slater acknowledged the past 12 months have been “painful for shareholders” but that “significant operational progress continues, reflecting the accelerating pace of change throughout the economy.”

Slater said Scottish Mortgage would “not deviate from [our approach] to avoid short-term headwinds” and that “if patient ownership of growth companies was easy, there would be far more competition.”

Over the last 10 years, Scottish Mortgage’s net asset value per share has increased by 347% compared to a 181% increase in the FTSE All-World index.

Slater continued: “There is no going back to a world of static and unchanging industries. The retreat to perceived safety can only be temporary, as safety is ephemeral amidst such upheaval.

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

Scottish Mortgage saw its share price almost triple during 2020 and 2021 from around £5.80 to over £15, but the stock was routed amid the global sell off in the fund’s beloved “growth” and technology stocks and it currently trades around £6.18.

Scottish Mortgage’s results revealed that Baillie Gifford’s funds under management and advice in active equity and bond portfolios has fallen to around £226 billion — down from roughly £360 billion at December 31, 2021.

Looking to the future, Slater highlighted the Trust’s largest holding, Moderna, and how it has “demonstrated that mRNA technology can be used to create effective personalised cancer vaccines” and “the number of potential applications for Moderna’s technology is multiplying.”

Slater also noted the Trust’s largest private holding, Space Exploration Technologies (Space X), made 60 launches in 2022, more than one per week and twice the number it achieved the previous year.

Slater said: “The commercial space market has finally become a reality thanks to SpaceX’s reusable rockets, which have reduced launch costs by 95% from those of the space shuttle.”

Investing in private companies has formed part of Scottish Mortgage’s strategy since 2012. The fund invests in in large, late-stage companies, with an average size of $10 billion and a global footprint.

Baillie Gifford said it has a “robust private company valuation process.”

Since its first investment in private companies in 2012, Scottish Mortgage has deployed £4.4 billion of capital into a total of 94 firms, of which 35 listed and seven were taken over. At March 31, 2023, the fund held 52 private companies which equate to 28.6% of total assets. No companies listed during the financial year.

Scottish Mortgage said that during the year to March 31, 2023, 532 company revaluations were made with 84% of the private instruments held re-valued more than five times.

The fund’s deputy manager Lawrence Burns said: “We have never aspired to become early-stage venture capitalists. We merely adapted to the type of companies we invested in choosing to stay private longer.

“The companies that make up the bulk of our private company exposure are consequently neither small nor early-stage.

“We have several private holdings that already have many thousands of employees and billions in annual revenue.”

Another of the fund’s private holdings, European battery manufacturer Northvolt, made its first commercial deliveries in 2022.

Slater said the company is “tapping into enormous latent demand for electrification, with $55 billion of contracts to supply major automotive manufacturers.”

Burns concluded: “The role of Scottish Mortgage will continue to be to support the growth in entrepreneurship in good times and bad, whether public or private and through doing so generate long-term returns for our shareholders.”