The pace of current technological innovation mirrors that of many of the previous significant nonlinear steps in progress seen over the course of human history, with artificial intelligence models now matching, if not exceeding, human performance in a multitude of intelligence tasks, including image recognition and comprehension. The adoption of generalist AI tools is also running at a far faster rate than that seen with the likes of the internet, and cost declines are following that well-trodden path of Moore's law. The implications and disruption of this wave of innovation will likely play out over many years, if not decades, but it is clear that many significant businesses and markets will be borne out of its productive potential.
This week's interview was recorded on the 2nd of April in the afternoon, prior to President Trump's market-impactful speech which laid out reciprocal tariffs to correct what he sees as an imbalance in the terms between the US and its trading partners, a topic we will undoubtedly tackle in coming future episodes. But it is always hugely insightful to hear the well-considered views from Tom Slater, the portfolio manager of the Scottish Mortgage Investment Trust. Welcome to the Investor Insights podcast, hosted by Killick and Co. My name is Gordon Smith, and in each episode I'll be interviewing portfolio managers from across the investment industry to gain from their expertise in the specialist areas in which they invest, and to question them on topical issues. You can access the full series of interviews via the playlist on the Killick and Co YouTube channel, or by searching for Killick and Co's Investor Insights on Spotify, where you can subscribe and be notified of future episodes. We hope you're enjoying the discussion so far, and you can get in contact with us about any of the topics discussed via the email address
[email protected]. Killick and Co is an independently owned wealth manager which opened its first office in 1989 and provides services to help families save, plan, and invest, and you can find more details on the unique ways in which we do that at our website killick.com.
This week's episode features Tom Slater, who joined Baillie Gifford in the year 2000 and has been the lead portfolio manager on the Scottish Mortgage Investment Trust since 2015, after joining the team as deputy manager in 2009. Tom also holds the role of head of US equities at Baillie Gifford, which manages their long-term growth equity strategy. The Scottish Mortgage Investment Trust, or SMT, will need little introduction to many listeners. The London-listed trust, with a market cap of around £11 billion sterling, is a constituent of the FTSE 100 index and is run by Tom and his team at asset manager Baillie Gifford. The trust invests in a high-conviction global portfolio of companies with the aim of maximising total returns over the long term by aiming to find and invest in what the team believe are the most exceptional growth companies around the world, focusing on companies which are driving change, often have visionary leadership teams, and provide long-term capital to support their growth, whether that's in the form of an investment in a private business or one in publicly listed shares.
We discuss various elements of the Scottish Mortgage portfolio in our discussion, including the private portfolio, as unlisted investments have remained a topic of much debate across the investment company sector over the last year. In our view, the trust's beneficial closed-end structure and the access enabled by Baillie Gifford provides investors with exposure to a number of large, influential private businesses and does so at comparatively lower cost when considering the terms on typical private equity and venture capital fund structures. The private equity element is a clear differentiator, but does introduce complexity to the strategy, as private assets bring illiquidity to the underlying portfolio and valuation uncertainty given the lack of a market quote. However, Scottish Mortgage private holdings provide access to areas of the market where there is often no public market comparators, and we talk through SpaceX as a noteworthy example a little later.
We also view Scottish Mortgage's valuation policy as being sector-leading, with private valuations carried out on a minimum of a rolling three-month cycle. But in reality, the independent valuation of private holdings occurs on a more frequent basis whenever these unlisted companies hit any trigger events, including funding rounds or material movements in the valuations of publicly listed peers or comparator indices, with the 50 private holdings in the portfolio undergoing over 400 revaluations in 2024, for example, each of these feeding through into the daily NAV calculation published by the company.
We welcomed Tom and the Scottish Mortgage team into our London offices earlier this week and recorded this interview in person. We've reached episode 50 of the Investor Insights series now. We hope you've enjoyed the discussion so far. Please do get in touch if there's any topics you'd like us to cover in future episodes. We hope you enjoy this conversation. Tom, good afternoon. Thank you so much for joining us in the office today. So delighted to have you with us. How are you doing today?
Very well, thank you. Thank you very much for having me.
We have this kind of standard first question to these, which we've asked, I think, every speaker that we've had on the series so far, and what it aims to do is just get a bit of an insight into kind of how you go about your work. So we ask for whether there's an anecdote from a recent research trip you've done, or a meeting, or even just a book recommendation or an article you've read, anything that you could share just to give us a bit of a feel for kind of how you go about things.
Yeah, of course. I think the book that I've just finished, which was really interesting to me, was 'The Master and His Emissary', which is talking about the different brain hemispheres. So the master is the right side of the brain and his emissary is the left side of the brain. And the reason it was interesting to me, apart from the sort of not knowing anything about the science of the brain anyway, is actually framing my thinking about AI. You know, everybody sort of both knows that AI is coming, is increasingly impactful, don't know quite where it ends. And I thought that this book was useful framing because it showed that AI is really good at left-brain tasks. So is AI going to replace humans? Well, it's probably going to be better at those things that you... the left brain is the bit of the brain that's responsible for speech, for sort of logical problem-solving type applications. But the left brain is completely divorced from the real world; it works in a representation of the real world, and you actually need your right brain for everything that's actually important to you as a human. And from what I can see, there's no evidence of AI doing anything that happens in the right-hand side of your brain.
Yeah, thanks for that. I'll add that book to my reading list. Sounds like an interesting one for a take on that kind of ongoing debate about where AI could replace kind of human tasks, I guess.
So I'm a listener on the Scottish Mortgage podcast. You have your own podcast, 'Invest in Progress', and I'd recommend it to our listeners. Kind of goes that one step further, I guess. We're talking to the portfolio managers; you guys are talking to the kind of founders, the company leaders themselves. But there's kind of two takeaways I kind of often get from the discussions. One is that there's often a kind of interesting story that kind of is the reason why a founder started a business in the first place, and you often kind of start with that as the kind of first bit of the discussion. But also, secondly, kind of how you've been introduced to the businesses is often from kind of networks elsewhere. I wondered if there were kind of other common characteristics that you've got from those discussions and others that you've had behind, like the kind of routes to which Baillie Gifford has been able to access deals and the types of businesses you're investing in.
Yeah, I mean, I've really enjoyed doing the podcast. I thought it was a way that we could help our shareholders better understand what they own. You know, most people know what Amazon does, but actually there's all sorts of interesting companies and stories that we thought it would be interesting for people to learn. What I didn't expect was that I would learn a lot about those companies in that process. And you know, I think you mentioned the sort of personal aspects of it, or just how it actually feels when they're doing some of the things that they do. I think you just got to... I found it a really interesting and fun thing to do.
In terms of how we find these companies, I actually think the most useful place to start is Amazon. I think so, we first put shares in Amazon in 2004 and we still own them today. So that's 21 years, and that really matters. If you're leading an interesting private company, you're thinking about one day being a public company, you think carefully about who you want your shareholders to be, because while you're still private, you have the choice. And so, you know, not just reputation, but how you've acted is really important. Could you be a sizable shareholder in my company, and would you be there with me for the long term, or are you just trying to make a quick buck? And so that's the... I think that's the key to all of the access. And then, you know, I think we just invest in some really interesting companies led by some brilliant people, and we place a great deal of store in just listening to what they have to say. You know, Jeff Bezos is a genius. I'm not so... so listening to what he's saying, listening, trying to learn from him, trying to learn from some of the contacts, looking at what else people are interested in. And often it's introductions from those companies. You know, founders speak to each other, and so investing in that network, living up to what you say you'll do, is really important for getting access.
Yeah, that certainly comes across in the discussions that you've had, for sure. So let's move on to talk about some of the elements of the portfolio and some of your commentary kind of over recent months. I guess it's referenced some, over the last year certainly, has referenced some allocation changes within that kind of AI piece or the AI ecosystem. You've made some changes there. It's obviously been an area of the market which has really driven things over quite a period now. Could I ask you just to kind of talk through where you're currently sat and where you're seeing kind of current opportunities in that AI piece?
Yeah, of course. So we think AI is a general-purpose technology which will have really widespread application. It will be ubiquitous. To be ubiquitous, it has to be really cheap. I think that's one of the lessons from the previous sort of technology waves that we've invested through. And so we're looking for companies that can both deploy this, that can bring something different, that's differentiated, that they can capture value from. Up until this point, it's been the chip manufacturers that have really been able to capture the value. We were hugely undersupplied with compute power for this revolution. It's allowed Nvidia to make enormous profits. We took a lot of money out of Nvidia last year. We just think it's been a perfect market for Nvidia, and it's hard to imagine the conditions getting any better for them. We've reinvested a significant chunk of that money into TSMC. They make fabs for making chips. They will be a beneficiary of more compute, no matter who is the producer of those chips. We think they're in an increasingly dominant position in that industry, and we like the combination of the growth in revenue, the growth in demand, along with a really strong competitive position. And the other place we've put some of the money is into Meta, the owners of Facebook, Instagram, WhatsApp. And what we like there is that you have a technical founder who really understands how this technology can be deployed in his business immediately, and the fact that there are so many opportunities in that business to drive value, you know, improving the relevance of ads, you know, things like just improving the content of ads with AI to make them more effective, to make the conversion of those ads higher. So we really like that tight feedback loop between deploying this technology and generating revenues.
I wonder if we could maybe move on to talk about the private equity element of the portfolio and kind of give us an update there. It's obviously an important part of the strategy. I wonder if you could just reiterate kind of why it is so important for Scottish Mortgage. And if I was to pick on kind of one area of it, obviously SpaceX is very newsworthy over the last 12 months and the largest position. Could you give us a kind of update on the outlook for that business in particular?
