Baillie Gifford’s flagship investment trust, the £14 billion Scottish Mortgage fund, bounced back in the year to March 31, 2024, delivering a share price return of 32.5% in the year and rising 46% from a mid-year low.
That compares to the 21% return of the FTSE All-World Index.
Scottish Mortgage aims to find “the world’s most exceptional growth companies” around the world such as Nvidia, Spotify and SpaceX “and patiently own them over long periods of time.”
The fund’s biggest holdings currently also include ASML, Moderna, Amazon, Mercadolibre, Tesla, PDD Holdings, Northvolt, Ferrari, Bytedance, Meituan, The Brandtech Group, Wise and Stripe.
Scottish Mortgage delivered a net asset value (NAV) of 11.5 %.
The fund’s manager Tom Slater said: “There is a lot to be excited about. Artificial intelligence, digitalisation, scientific and engineering progress, and the opportunities presented by transitioning our energy model will provide fertile investment territory for years to come.”
Concerted action by the fund on share buybacks helped the investment trust’s “discount” narrow to 4.5%.
The strength of the share price, relative to the NAV, reflected the narrowing of the discount from 19.6% to 4.5%, after hitting a mid-year low of 22.7%.
The company’s board has recommended that total dividend be increased by 3.4% to 4.24p per share.
Over the last decade, the managers of Scottish Mortgage have delivered a NAV per share increase of 381.9% (16.2% annualised) compared to the 218.2% (12.2% annualised) increase of the FTSE All-World Index.
Some of Baillie Gifford’s funds suffered hugely amid the brutal global sell-off in 2022 in technology and growth stocks, which feature heavily in the firm’s portfolios.
Before the sell-off, Baillie Gifford’s assets under management had risen to roughly £360 billion — but now stand at about £230 billion.
The fund manager has about 1,800 staff and has offices in Edinburgh (HQ), Dublin, Frankfurt, Amsterdam, London, New York, Shanghai, Hong Kong, Toronto and Zurich.
Scottish Mortgage managers added five new companies to the fund’s portfolio, including the re-introduction of Meta; Insulet, which designs and manufactures tubeless pumps that integrate with glucose monitors for type-1 diabetics; and Sea, a digital entertainment, ecommerce and financial services business.
The investment trust sold its position in Tencent, the Chinese mobile platform, after 15 years due to “ongoing political and regulatory developments” in China — and sold another long-standing holding, Illumina.
Lawrence Burns, the fund’s deputy manager, said: “We’re greatly encouraged by the founders of our portfolio companies telling us that, to them, the pace and magnitude of technological-driven change has never appeared greater.
“The possibility of such change is a crucial enabler of the outlier outcomes we seek and aim to deliver for our shareholders.”
Scottish Mortgage also provided follow-on funding to eight private companies totalling £109.4 million. These holdings included Stripe, Redwood Materials and Tempus, which has now filed for an IPO in the US.
The fund has been investing in private companies since 2012. During that period, it has invested in 96 private companies, 36 of which have subsequently listed.
The investment trust is focused on investing in late stage private companies that are scaling up and becoming profitable. Private companies made up 26.2% of the fund’s holdings at March 31, 2024.
Slater added: “Our top 10 private holdings represent approximately two thirds of our private exposure, and the operating performance of these companies has been encouraging. We selectively supported holdings that raised money in the year.”
In March, the Scottish Mortgage board took concerted action to narrow the fund’s discount and announced it would make at least £1 billion available for share buybacks over the following two years.
Since April 1, 2023, to date the company has bought back 68.5 million shares at a total cost of £592 million, representing 4.9 % of the share capital in issue at the start of the year.
At the end of the year, gearing was 11%, a reduction from 14% at March 31, 2023. As part of that process, Scottish Mortgage paid back debt most sensitive to rising interest rates.
In his report, Slater added: “Our largest holdings, NVIDIA and ASML, are in the semiconductor industry. Demand for NVIDIA’s chips has vastly exceeded expectations, which has been an important driver of our returns.
“Without NVIDIA’s silicon or software, we would not be seeing such remarkable progress from AI systems. Our key consideration is the duration of the edge it has built over the competition.
“ASML, the Dutch manufacturer of the lithography equipment needed to produce cutting-edge semiconductors, has one of the most apparent competitive advantages we’ve ever encountered. Its innovations are the central enablers of miniaturisation in semiconductors.
“Growth in datacentres and AI applications augment the growing demand for chips in many industries. At the same time, chips are getting bigger, and the desire for greater sovereignty in semiconductors is fuelling demand for capital equipment.
“The offset to these encouraging trends is geopolitics impinging on the company’s equipment sales in China. The immediate challenge is demonstrating that innovation can continue following the retirement of CEO Peter Wennink and President and CTO Martin van den Brink.
“Amazon and Spotify have taken drastic action to increase their resilience in the past year, and stock markets have strongly rewarded them both. We added to Amazon, and it has regained its position as one of our top holdings. It is now reaping the benefits of substantial capacity increases made during Covid-19.
“Periods of investment and cost increases at both companies have ended, and there has been a much greater focus on efficiency, reflected in margin improvement. The growth opportunities are exciting, and both exemplify the types of businesses that seem likely to benefit from developments in AI.
“We are seeing many companies invest in AI systems to improve their operations but for investors, there is an essential question of whether this generates additional returns or ends up being a zero-sum game. Spotify is a platform business that benefits from the breadth and scale of content on its platform. AI will likely lead to an explosion in available content, improving its economics in a way that others cannot mitigate.
“If AI revolutionises how we purchase products, this is likely to favour Amazon, the company with the most consumer data and a vast physical infrastructure for getting products to those consumers.
“Tesla, which we reduced partway through the year, is at a fascinating juncture. Its recent products have been hugely successful, and preliminary sales data indicate that the Model Y was the best-selling vehicle in the world last year. However, the rise in interest rates has reduced the affordability of all high-ticket items, including Tesla vehicles, depressing demand.
“At the same time, the rapid scaling of Chinese electric vehicle production, along with improving quality, is a powerful source of competition and pricing pressure. All of this may be irrelevant to the long-term investment story. Tesla’s massive investment in AI looks to be paying off with the rapid improvement in its self-driving software.
“User reports on the latest version, now entirely AI-controlled, are very favourable, and the company is installing it in all new US vehicles. Tesla is harnessing the same investments to produce humanoid robots, whose capabilities are progressing along an exponential trajectory.
“Our largest private position, SpaceX, now a bigger holding than Tesla, launched 96 rockets last year (accounting for two-thirds of all commercial launches). It has no peers when it comes to scale and cost efficiency. The company’s latest rocket, Starship, has unprecedented capabilities and will transport 150 metric tonnes of payload. It is close to commercial launch.
“Starlink, the satellite communications subsidiary, has 2.3 million subscribers and is growing rapidly bringing connectivity to underserved parts of the world. Its unique access to launch capacity puts it way ahead of potential competitors. It already has sufficient scale to generate cash.”
Slater told London newspaper The Financial Times that Scottish Mortgage plans to back Elon Musk’s $56 billion pay award next month. The package is based on a series of stock options Musk was given in 2018.
“We agreed the remuneration package with Tesla back in 2018 because it introduced extremely stretching targets that would make a huge amount of money for shareholders if they were reached,” said Slater. “Having agreed to that, we believe that it should be paid out.”
Burns added in his report: “In the summer of 2018, I was fortunate to spend two full days in Palo Alto talking with Professor Brian Arthur, one of the world’s most influential thinkers on technology and the economy.
“He told me he thought artificial intelligence (AI) would be the most significant invention since the Gutenberg printing press.
“It was quite a statement, given that the printing press was invented over half a millennium ago. Before its invention, scribes painstakingly copied books by hand. Most were kept in monasteries chained to desks to prevent theft. Gutenberg’s invention made knowledge accessible, allowing ideas to spread like never before. It powered the Scientific Revolution, the Reformation, and countless political revolutions. Its impact was profound and immeasurable.
“AI has the potential to impact the world similarly, but instead of externalising information, it is externalising intelligence. Making it available at rapidly decreasing cost anywhere in the world, instantly and on demand.
“That could be to write a high school student’s essay on the reign of Queen Victoria or to help a radiologist identify a cancerous tumour. Given that you can do even more with intelligence than you can with information, Brian Arthur concluded that, logically, AI’s impact should be even more significant than the printing press.
“Fast-forward nearly six years, and his views look increasingly prescient. The latest AI models now very nearly match or exceed human performance in a growing number of tasks, including image classification, reading comprehension, visual reasoning and competition-level mathematics.
“The progress in surpassing human performance FTSE benchmarks has been so fast that the editor-in-chief of the AI Index recently commented that a decade ago, FTSE benchmarks would serve the AI community for five-to-ten years, but now they often become irrelevant in just a few years.
“This pace of progress has been made possible by the continued exponential improvement of the three inputs that drive AI performance: compute, data and algorithms. A way of measuring these improvements is the number of parameters a model has. Each parameter is a variable that the model can adjust during the training to better predict outcomes.
“In 2018, when talking to Professor Arthur, GPT-1 had just been released, and it had 100 million parameters. Earlier this year, OpenAI released GPT-4, which is believed to have 1.7 trillion parameters, demonstrating the rapid change in model size and complexity in just a few years.
“When considering investment opportunities within AI, it can be helpful to divide them into three layers: hardware, infrastructure, and applications. Scottish Mortgage is invested in companies involved in each of these layers.”