By Mark McSherry
Baillie Gifford’s flagship investment trust, the £13.5 billion Scottish Mortgage fund, said it cashed in some of its huge profits from the shares of Nvidia, the leading designer of semiconductors for AI, over recent months.
Scottish Mortgage said it was early to spot the potential of Nvidia, first investing in the company in 2016, and making a total return of 8,591%.
Nvidia remains one of the fund’s biggest holdings, at 4.1% of assets.
The other largest holdings in the Scottish Mortgage fund portfolio include MercadoLibre, Amazon.com, SpaceX, Tesla, Meituan, ASML, Meta Platforms, PDD Holdings, Ferrari, Moderna, Bytedance, TSMC, Tempus AI, Spotify and Stripe.
In the investment trust company’s results for the six months to September 2024, fund manager Tom Slater wrote: “Understanding the implications of this technology (AI) wave will be our task for the next decade.
“Despite growing conviction that generative AI will be a transformative general-purpose technology, we reduced our position in Nvidia, the leading designer of semiconductors for AI.
“The primary challenge hindering large-scale AI adoption remains the high cost. Companies must find ways to offer competitively priced AI systems while managing the skyrocketing costs of training them.
“This raises concerns about the sustainability of current capital equipment spending, including Nvidia chips.
“Our investment in the AI ecosystem is not limited to Nvidia. We’ve increased our exposure to Meta Platforms, the parent company of Facebook, Instagram, and WhatsApp.
“AI will improve Meta’s products and its business model provides many options for funding the necessary computing capacity.
“Its leadership team has a strong track record of successfully integrating technology innovations, giving us confidence in their strategy moving forward.”
For the six-months to September 30, the net asset value per share (NAV) of Scottish Mortgage increased 1.9%, compared to a rise of 3.6% for the FTSE All-World Index.
Over the past five years, Scottish Mortgage’s NAV has gained 88.9%, outpacing the index’s 66.9% rise. Over the last decade, the fund’s NAV has grown by 347.8%, compared with 211.3% for the index.
The fund is recommending an interim dividend of 1.60p per share, consistent with last year’s interim payment.
Scottish Mortgage have risen about 33% over the past 12 months.
Baillie Gifford, the Edinburgh-based fund management group, has over £221 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world.
On Scottish Mortgage’s big investment in Elon Musk’s SpaceX, Slater wrote: “SpaceX has made remarkable progress with its reusable Starship launch platform. Designed for rapid reusability, Starship dramatically reduces launch costs, making space more accessible for a variety of missions.
“This capability doesn’t just open new doors for SpaceX, it could redefine what humanity can achieve in space by making projects like lunar exploration, Mars missions, and space tourism more feasible.
“One of Starship’s primary impacts will be its support for Starlink, SpaceX’s satellite communication network. With Starship’s high payload capacity, SpaceX can deploy and maintain a vast constellation of Starlink satellites at an accelerated pace. The company has been steadily increasing the number and capabilities of these satellites, recently adding more powerful models to improve coverage, speed, and reliability.
“In parallel, SpaceX has introduced a more affordable Starlink ground terminal, lowering the barrier for users to access high-speed internet in remote or underserved areas. This combination of enhanced satellite infrastructure and accessible ground equipment is set to accelerate the growth of the space-based communications market, potentially connecting millions of people worldwide who previously had limited or no internet access.”
On the stocks that “dampened” the fund’s recent performance, including Moderna and Northvolt, Slater wrote: “While many of our portfolio companies performed well in both operational and stock price terms, two larger positions dampened our overall NAV growth.
“Moderna, the drug developer, has been underperforming. Its COVID vaccine franchise is in decline, and its new vaccine for respiratory syncytial virus has struggled to compete with established providers. This is disappointing, and we’re engaging with management to improve execution. However, we remain optimistic about Moderna’s differentiated pipeline of new therapies, which we expect to drive long-term improvement.
“Northvolt, the European battery manufacturer has struggled with production delays. It has announced it will lay off 1,600 staff and scale back its expansion plans, cancelling a project to increase its factory’s capacity. The company will need to deliver significant improvements if it is to retain the confidence of its stakeholders and capitalise on the vast opportunity that electrification of our transport system will present over the next decade.”
Slater concluded: “Our world is evolving rapidly, and with change comes opportunity. The founders and entrepreneurs leading our portfolio companies are well-positioned to seize these opportunities.
“Over the long term, earnings growth drives stock prices, and our portfolio consists of holdings growing much faster than the broader market.
“We believe that potential is not fully reflected in stock prices today, and we are excited about the returns they can deliver for our shareholders.”
Scottish Mortgage chair Justin Dowley wrote: “On 15 March 2024, the Board announced that it would make available at least £1 billion for the purpose of purchasing its own shares over the following two years.
“During the first half of this financial year the Company repurchased 100.6m shares, at a total cost of £880.1m. This activity has had a meaningful impact on the rating. The average discount was 8.9% over the period, which compares well to 16.2% over the previous financial year.
“Over the past few months, Directors held useful meetings with representatives of several shareholders, whose clients represent a large portion of the register in percentage terms. Some advocate for increased buyback activity, whilst others feel capital is best deployed into long-term investments.
“Balance is required. We take a pragmatic approach in making capital allocation calls between buying back shares and other uses of capital such as making new investments and reducing debt. Together, the Board and the Managers remain committed to the continuation of the buyback.”
Dowley said former Ignis Asset Management CEO Christopher Samuel will join Scottish Mortgage as an independent non-executive director on January 1, 2025, and succed Dowley as chair at the company’s AGM in 2025.
“Christopher Samuel is an experienced Chair and non-executive director with financial services expertise,” said Dowley.
“Formerly the Chief Executive of Ignis Asset Management, Christopher also held board-level executive positions at several asset management businesses including Gartmore, Hill Samuel Asset Management and Cambridge Place Investment Management.
“Prior to that he worked at Prudential-Bache and KPMG, where he qualified as a chartered accountant. Christopher is the Chair of BlackRock Throgmorton Trust plc and a non-executive director of Quilter plc, having previously been Chair of Quilter Financial Planning Limited.
“He was previously Chair of JP Morgan Japanese Investment Trust plc and a director of Alliance Trust, Sarasin, UIL and UIL Finance Limited.”