The manager of the Scottish Mortgage Investment Trust has acknowledged that the past 12 months have been “painful for shareholders” but that “significant operational progress continues, reflecting the accelerating pace of change throughout the economy”.
During the financial year to 31 March 2023, its share price and net asset value - calculated deducting borrowings at fair value - returned -33.5% and -17.8% respectively.
Tom Slater said the trust would “not deviate from [our approach] to avoid short-term headwinds” and that “if patient ownership of growth companies was easy, there would be far more competition”.
The trading update noted that over the last 10 years, Scottish Mortgage’s net asset value per share increased by 347%, compared to a 181% increase in the FTSE All-World index.
Slater continued: “There is no going back to a world of static and unchanging industries - the retreat to perceived safety can only be temporary, as safety is ephemeral amidst such upheaval.
“It is by investing in the agents of change and partnering to develop big new opportunities, that exceptional returns for shareholders will be generated.”
The trust’s largest holding, Moderna, has “demonstrated that mRNA technology can be used to create effective personalised cancer vaccines” and “the number of potential applications for Moderna’s technology is multiplying”, commented Slater.
Its largest private holding, Space X, made 60 launches in 2022 - more than one per week and twice the number it achieved the previous year - with Slater stating: “The commercial space market has finally become a reality thanks to SpaceX’s reusable rockets, which have reduced launch costs by 95% from those of the space shuttle.”
Scottish Mortgage invests in in large, late-stage companies, with an average size of $10bn and a global footprint.
During the year, 532 company revaluations were made, with 84% of the private instruments held re-valued more than five times. The average change at company level was -27.8%, and -40.1%, excluding companies revalued up.
Deputy manager Lawrence Burns said: “We have never aspired to become early-stage venture capitalists - we merely adapted to the type of companies we invested in choosing to stay private longer.
“The companies that make up the bulk of our private company exposure are consequently neither small nor early-stage - we have several private holdings that already have many thousands of employees and billions in annual revenue.”
Another of the trust’s private holdings, European battery manufacturer Northvolt, made its first commercial deliveries in 2022. Slater said the company is “tapping into enormous latent demand for electrification, with $55bn of contracts to supply major automotive manufacturers.”
Just under half (49.6%) of the portfolio has been held for five years or more, while just over a fifth (20.2%) has been held for a decade or more. The high conviction portfolio of 99 holdings also has 44.9% invested in the top 10 holdings and 78.6% in the top 30.
Since its first investment in private companies in 2012, Scottish Mortgage has deployed £4.4bn of capital into a total of 94 companies, of which 35 listed and seven were taken over. At 31 March 2023, the trust holds 52 private companies, which equate to 28.6% of total assets.
The trust also reported that ongoing charges were 0.34% - a small rise from the previous year - although it argued that this remains less than most actively managed funds.
The increase is due to a reduction in the proportion of total assets above £4bn, which attracts the lowest management fee rate of 0.25%.
During the year, the trust also sought to address the excess supply of shares by buying back 36.5 million shares at a total cost of £283.3m, representing 2.5% of the share capital in issue at the start of the year.
At 31 March 2023, share price discount to net asset value is 19.6%, and 10.3% over 12-month average.
The trust was launched in 1909 and has been a constituent of the FTSE 100 since March 2017. It has total assets of £13.3bn at the end of March.
It is managed by Baillie Gifford & Co, the Edinburgh-based investment management partnership.
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