Shareholders of have been on an extraordinary roller coaster. In the five years to November 2021, the share price almost quintupled before falling nearly 60% in the next 18 months. Since then, they have risen 150% to a new all-time high, putting them easily at the top of the performance table of global funds over three years.

Recent attention has focused on SpaceX, in which Scottish Mortgage invested in 2018 at a valuation of $31 billion. Following an initial public offering (IPO) in June, its market value is over $2 trillion and Scottish Mortgage has sold it down from more than 25% of the portfolio to 15%. Still, “we have no intention of selling out and expect to hold the shares for ten years”, says Lawrence Burns, who manages the trust with Tom Slater.

AI firm Anthropic is also heading for an IPO. It was 3.9% of the portfolio at 22 September but likely to rise to over 5% at the target valuation. TikTok owner ByteDance, which accounts for 4.4%, is likely to stay private, while payments firm Stripe, which also has no plans to float, is 2.9%. Overall, Scottish Mortgage’s decision in 2012 to invest in private companies has been amply vindicated. (The unlisted limit was later set at 30% of the portfolio, but the actual proportion is currently 22%.)

Why Scottish Mortgage Investment Trust cut exposure to Tesla

Scottish Mortgage also has a strong record in listed companies, including Nvidia and TSMC. It did well from Tesla, but sold out this year. “Tesla paved the way for decarbonisation in a key sector, forcing incumbents to keep up in the EV race,” says Slater.

“However, the competitive environment for Tesla has intensified significantly, particularly in China. There are long-term opportunities in Tesla's autonomous driving software and robotics businesses, but though these areas have the potential to be very large and profitable in the future, we believe we are being asked to pay too much for them.”

Moderna, which soared 22-fold between the end of 2019 and September 2021, was once Scottish Mortgage’s largest investment before it collapsed by 94% in the next four years. The company had developed a novel technology for the discovery of vaccines against a variety of conditions, including cancer. But it was the success of its Covid vaccine that sent revenues rocketing from $60 million in 2019 to $18.5 billion in 2021. However, sales collapsed as Covid demand fell away. Profits of $12 billion in 2021 turned into losses, while the company also became embroiled in a series of patent disputes.

Investors stampeded for the exit, but Slater and Burns held their nerve. The shares started to recover as progress in its respiratory vaccines gained momentum. Then in August this year, a phase III trial for a vaccine for late-stage skin cancer in combination with Merck's Keytruda drug produced very promising results, though experts advise caution. Moderna doubled on the news and is now nearly 4% of the portfolio.

Scottish Mortgage Trust embraces AI

The managers are optimistic about AI. “The companies leaning into AI are seeing greater and greater value,” says Burns. “The demand drivers will only get stronger; hyper-scalers (builders of data centres) can't afford to miss out. Companies are thinking about redirecting their entire processes around AI. The returns on hardware are fantastic and the technology keeps getting better. We are going to need a lot more compute if the potential continues to grow.”

At the cutting edge, the trust also has a small holding in PsiQuantum. But “we invest in growth, not pure technology so will have a small holding till our conviction in quantum computing increases”, says Burns. However, “there are lots of natural phenomena that are very hard to model with conventional computing”, so this area has huge potential.

After a strong run, holders of Scottish Mortgage Trust may want to trim their holdings, but the shares could have much further to go.

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