Scottish Mortgage pins its hopes on AI

It has been a difficult couple of years for Scottish Mortgage, but the latest annual results suggest that it may have finally turned the corner. Baillie Gifford’s flagship fund is one of the most popular investment trusts in the country and the managers are really upbeat about its prospects.

Tom Slater and Lawrence Burns have a unique approach where they try to identify the world’s most exceptional growth companies. They think that the small number of stocks that are capable of delivering transformative change will drive stock market returns.

Concentrated portfolio

The fund is designed to provide exposure to some of the most exciting growth trends. These include: the digitalisation of more aspects of life, particularly through artificial intelligence (AI); the development of innovative treatments via the application of technology to healthcare; and the energy transition to non-carbon alternatives.

This approach has resulted in the construction of a concentrated portfolio that at the end of April consisted of 45 listed stocks accounting for 72.3% of the assets and a further 53 private companies that made up the balance. Almost half of the fund is invested in the ten largest positions that include well-known names such as: Nvidia, ASML, Moderna, Amazon and SpaceX.

Scottish Mortgage top 10 holdings

1. NVIDIA
2. ASML
3. Moderna
4. Amazon
5. MercadoLibre
6. Space Exploration Technologies
7. PDD Holdings
8. Tesla
9. Ferrari
10. Northvolt

Source: Scottish Mortgage, as at 30 April 2024.

The future is AI

The managers have a huge amount of faith in Artificial Intelligence (AI), which Burns thinks could be the most significant invention since the Gutenberg printing press in 1440. A third of the fund is now invested in this area, with the opportunities divided into three layers: hardware, infrastructure and applications.

Hardware refers to the physical computational devices that enable AI, with the holdings in this category including the chip designer Nvidia, as well as the Taiwan Semiconductor Manufacturing Company, where many of the chips are actually made.

Infrastructure covers the cloud service providers like Amazon and Meta. It is these businesses that use the chips to offer scalable, on-demand access that allows companies to train and deploy AI models without building their own delivery mechanisms.

The final layer, applications, relates to those stocks that use AI to expand addressable markets, reduce costs and dig deeper competitive moats. Investments that fall into this segment include: Tesla, Tempus and Spotify.

Are the unlisted holdings about to take off?

One of the most controversial aspects of the fund is the unlisted exposure, which temporarily breached the 30% cap due to the fall in the value of the quoted portfolio. This is no longer the case however and there could be some significant news flow in the near future.

The largest holding at 4% of the assets is Elon Musk’s SpaceX, which owns Starlink, the operator of 6,000 satellites that provide internet access to 2.7m subscribers across 75 countries. It has made remarkable progress and could be listed at some point in the next few years, as could the second biggest position, battery maker Northvolt.

One billion pound share buyback programme

Like many other investment trusts, shares in Scottish Mortgage had fallen well below their net asset value (NAV), but in March the Board announced a buyback programme of at least a billion pounds over two years. The discount has since narrowed to around 8%, with the trust ‘committed to facilitating trading around NAV in normal market conditions’.

Performance

In the annual results to the end of March, Scottish Mortgage made an NAV total return of 11.5%, which was a big improvement on the year before albeit way behind the 21% increase in the FTSE All-World index. However, the share price gain of 32.5% was much stronger due to the narrowing of the discount. Please remember past performance is not a reliable indicator of future returns.

Despite the recent challenges the longer-term record is still exceptional. In the decade to the end of April the fund made an NAV total return of 391.9%. This was far in excess of the 211.7% achieved by the benchmark.

Important information: investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in the Scottish Mortgage Investment Trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.