The solid-sounding name of Scottish Mortgage belies the racy nature of this FTSE 100 member investment trust.
Its portfolio is not made up of loans advanced to Scots homeowners. Rather it is a bet on innovation in AI (artificial intelligence) and other fields in the US, Europe and China.
Scottish Mortgage’s largest quoted company holdings include the tech titan Nvidia, maker of AI microchips and ASML, the Dutch group, the number one in the manufacturing of the machines that make microchips.
Scottish Mortgage has been a long-term holder of Tesla and seen the shares rocket but other disruptive bets have not paid off recently
More controversial is the trust’s unquoted ‘private equity’ element which constitutes about 27 per cent of the portfolio. Some of the investments are obscure. Others are world-famous such as ByteDance, the Chinese owner of TikTok and Elon Musk’s SpaceX.
These businesses excite many investors. But they do not impress the holder of 5 per cent of the trust’s shares – US activist investor Paul Singer, boss of the Elliott Investment Management hedge fund and veteran of battles against the boards of drugs group GSK and others.
Singer may own the bookshop Waterstones and was proprietor of the football club AC Milan until 2022. But the 79-year old does not seem to wish to devote his time to such pursuits, being more interested in forcing change at the companies where he invests.
Scottish Mortgage’s other investors ought now to consider if they like the strategy Singer wants the trust to pursue – for he may succeed.
Baillie Gifford, Scottish Mortgage’s manager, is known for having the courage of its convictions.
Some call the stance ‘arrogant’ and even ‘cult-like’. But Singer can be very persuasive. This is the man who impounded an Argentinian vessel to force the country to settle lapsed bond debts.
Singer argues that Scottish Mortgage should buy back its own shares, a mechanism that aims to boost the share price, reducing the discount between the price and the trust’s NAV – net asset value.
A narrowing of the discount would be welcome. But to achieve this, some of the quoted stocks might need to be sold off, increasing the proportion held in the more illiquid unlisted companies.
Trimming these unlisted holdings would be challenging. Normally some would proceed to an IPO, becoming quoted companies. But there is less activity in this section of the market at present.
Disposing of these stakes by other means risks depriving the trust of some of the future stars of tech.
This opportunity to be a small-time venture capitalist by backing such businesses is one of the reasons why I have put a small amount into Scottish Mortgage each month for more than a decade.
But this is an adventurous choice, suitable for those happy to take a long-term view.
The trust’s shares have almost halved since their peak in the autumn of 2021 and there is no guarantee that Singer’s intervention can rapidly reverse this trend.
If you would prefer something with a lower risk profile, there are many other global trusts such as F&C which also provide some AI industrial revolution exposure.
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