Global pressures

Scottish Mortgage sees AI gains in China and US

Tom Slater
Tom Slater: steadfast in our mission (pic: Terry Murden / DB Media Services)

Managers of the giant Scottish Mortgage Investment Trust are backing more Chinese ventures alongside pioneering US companies as advances in technology continue to produce solid returns.

The FTSE 100 listed company, managed by Edinburgh-based Baillie Gifford, said it was making progress agains the challenges thrown up by volatile markets and geo-political tensions.

In the year to 31 March it said it narrowed the discount to net asset value, a key concern of shareholders, from 19.6% to 4.5%, after hitting a mid-year low of 22.7%. The share price increased 32.5% in the period and the net asset value (NAV) on its holdings increased by 11.5%.

Over the last decade, its managers have delivered a NAV per share increase of 381.9%, compared to a 218.2% increase in the FTSE All-World index.

At the close its shares were 30p, or 3.5%, higher at 900p.

Chairman Justin Dowley said global forces “have been pulling investors in different directions” but he said there was optimism around the integration of artificial intelligence into business models.

“Meanwhile, the macroeconomic and geopolitical factors driving market anxiety are too numerous to mention,” he said. “Gains were highly concentrated, driven by a handful of large AI enabled companies in the US, augmented by beneficiaries of strong energy prices and high interest rates.”

He added: “Scottish Mortgage remains well positioned to navigate such environments. From a portfolio perspective, our long investment horizon provides the opportunity to step back from the noise. Our managers, Tom Slater and Lawrence Burns, continue to be constructive and patient owners of a diverse range of resilient companies that possess the potential to shape the future of the modern economy.

“t is pleasing to note that these companies continue to deliver strong operational performance and remain in robust financial health.”

With a nod to recent pressure from shareholders, Mr Dowley acknowledged that SMIT’s shares traded at a discount to net asset value per share throughout the year.

“Tackling this disconnect was an active debate. Whilst the drivers of the discount are a matter of conjecture, the company possesses a clearly defined investment strategy; a strong balance sheet; and a portfolio of growing companies delivering strong operational results.

“The investment opportunity was clear, the discount unwarranted, and concerted action was required.”

This resulted in making at least £1 billion available to buy back shares over the next two years. The discount has narrowed and it key activist, the New York-based activist investor Elliott Advisors, has cut its stake in a move seen as a withdrawal from further attempts to influence the board.

Co-manager Tom Slater added: “We live in a world of ongoing geopolitical tensions, shifting monetary policies and disruptive technology. Against this dynamic backdrop, Scottish Mortgage remains steadfast in its mission: seeking out exceptional companies capable of delivering long-term growth and transformative change.

“Events like the Covid-19 pandemic, supply chain disruptions, two global conflicts and an emerging cold war between the US and China are eroding trust in the fundamental arrangement of the economy.

“People are more uncertain about trade agreements, financial structures, democratic provisions, the reasonableness of judicial decisions, and the dependability of public health provisions. This feeling of instability makes the idea of rational decision-making less reliable.”

He noted that there was a pull back from globalisation with the US bringing semiconductor manufacturing back from China and EU repatriating energy production following the invasion of Ukraine.

The company reduced its stake in Tesla which “is at a fascinating juncture”, he said. 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.

SMIT has cut its stake in Tesla, but says it is making rapid advance in technology

“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,” said Mr Slater Tesla’s massive investment in AI “looks to be paying off” with the rapid improvement in its self-driving software and Tesla is harnessing the same investments to produce humanoid robots, “whose capabilities are progressing along an exponential trajectory.”

The trust’s largest private position, SpaceX, now a bigger holding than Tesla, launched 96 rockets last year.

SMIT’s largest holdings, NVIDIA and ASML, are in the semiconductor industry. Mr Slater said demand for NVIDIA’s chips has “vastly exceeded expectations, which has been an important driver of our returns.”

He said: “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.

Mr Slater said there has been little change elsewhere in the private portfolio. Its top ten private holdings represent approximately two thirds of its private exposure, “and the operating performance of these companies has been encouraging”.

He added: “The combination of a weak domestic economy, an uncertain regulatory environment and geopolitical concerns have made the inclusion criteria for Chinese stocks in the portfolio more demanding. However, the vast domestic market and exceptional entrepreneurs mean we continue to take Chinese investments seriously.”

Drugs developer Moderna offset some of the bumper AI-led gains, although Scottish Mortgage said its significant investment in the US pharmaceuticals company has remained unchanged.

“Vaccine fatigue has presented a challenge for the company, with vaccination levels for endemic Covid-19 well below expectations,” said the trust.

The board is recommending the total dividend is increased by 3.4% to 4.24 pence per share (2023 – 4.10 pence per share). Assuming approval by shareholders, a final dividend of 2.64 pence per share will be paid on 11 July.

The Annual General Meeting will be held at 4.30pm on 4 July at the National Galleries of Scotland, Princes Street Gardens entrance, Hawthornden Lecture Theatre, The Mound, Edinburgh.

… more follows

Leave a Reply

Your email address will not be published. Required fields are marked as *

This site uses Akismet to reduce spam. Learn how your comment data is processed.