Is Scottish Mortgage on the cusp of a recovery?

There was a significant improvement in market sentiment towards the end of 2023, as investors began to believe that interest rates had peaked. The view was reinforced by the US Federal Reserve’s December meeting, with officials predicting that they would cut rates three times this year in response to falling inflation.

Many of the world’s stock markets rallied strongly once the belief started to take hold at the end of October, although the momentum has waned in the last couple of weeks. One of the beneficiaries was the Scottish Mortgage investment trust, whose portfolio of high growth companies had been written down sharply as rates had risen.

What does the trust invest in?

Scottish Mortgage aims to identify, own and support the world’s most exceptional growth stocks. In order to do this the managers employ an unconstrained approach that enables them to access both public and private companies across the globe.

Their high conviction strategy has resulted in a concentrated portfolio of 47 publicly listed stocks representing 70.6% of the assets, as well as 52 private holdings that account for a further 28.7%¹. This is just below the 30% cap for the fund as measured at the time of investment.

The largest 30 positions make up 77.4% of the portfolio. These include well-known names such as: chip maker NVIDIA; online retailer Amazon; Tesla, the electric car maker; biotech giant Moderna; and the rocket and satellite company, Space Exploration Technologies.

Scottish Mortgage top 10 holdings

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

Source: Scottish Mortgage, as at 31 November 2023

What is the manager’s latest view?

In the interim accounts for the six months to the end of September, the manager said that the portfolio companies were in ‘robust health’, with the tougher financial conditions making them focus on profitable growth. The fall in their share prices has also made the valuations more attractive.

Many of the holdings have implemented various cost cutting measures and although they are still investing in research and development (R&D), they are focusing on the most promising projects. This has enabled the free cash flow from the listed segment of the portfolio to more than double in the year to the end of June.

Perhaps the most significant part of the update was the manager’s view of Artificial Intelligence (AI). He thinks that the giant consumer technology companies are well placed to capitalise on the developments in this area and that they could experience a period of very fast growth.

One of the main beneficiaries so far has been the chipmaker NVIDIA, which the fund purchased in 2016. The company has been a key provider of the computing infrastructure that has made the changes in AI possible and has seen its revenues increase more than 200% year-on-year.²

What has the fund manager been buying? 

In the six months to the end of September there were two new additions to the portfolio. They were: Coupang, South Korea’s largest online marketplace; and Oddity, a beauty and wellness technology business that was purchased as a private company then floated in July.

Is the large unlisted exposure a problem?

Scottish Mortgage has attracted criticism for its significant unlisted exposure, although most of the underlying companies are relatively large, mature businesses, rather than risky start-ups. The fund actively revalues these holdings on a regular basis, with all of them being reviewed at least twice during the six month reporting period.

It is possible that two of the biggest positions could float this year, which could increase investor confidence in this area. There is speculation that Elon Musk’s satellite company Starlink could be spun out of Space Exploration and list, while press reports suggest that battery maker Northvolt is considering an initial public offer (IPO).

How has it performed?

At their all-time high in 2021 the shares were trading at £15, but the sharp increase in interest rates has taken its toll and they are currently around 50% below the peak.

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.