Good morning and welcome to this Scottish Mortgage investor webinar. I'm Claire Shaw, portfolio director, and today I am joined by investment managers Tom Slater and Lawrence Spence. If you've joined us on one of these webinars before, you'll be familiar with the structure, but if we're welcoming you for the first time, the purpose of today is simple: to answer as many of your questions as we can.
We have 45 minutes set aside to cover the topics on your minds, but if we're still seeing high volumes of questions coming in, we'll run up to the hour. Thank you to those who submitted questions in advance, but you can also ask questions throughout the webinar by using the Q&A function on the screen.
It's been nearly a year since we last hosted a Your Questions Answered webinar, and in that time the share price is up 40%. We've had two companies make the transition from private markets to public markets with IPOs in Tempest AI and Horizon Robotics. There has been a seismic shift in the geopolitical landscape with the re-election of President Trump, and AI capabilities continue to evolve at an unprecedented pace. I'm sure we'll cover all of these topics today.
However, one of the big talking points for Scottish Mortgage last year was the announcement we made in March 2024, when the board stated their intentions to buy back at least one billion pounds worth of shares. So perhaps to kick things off, as we've had a large volume of questions coming on this topic, Tom, if I can come to you first, please can you provide an update on the buyback: how much you've bought back, is it working, and are there plans to buy back more?
Yeah, thanks, Claire. So we made that announcement that we would buy back at least a billion pounds worth of shares. I checked the number this morning: we've bought 1.6 billion pounds worth back at this point. The discount when we announced the buyback was about 14.5%, today it's about 8.5%.
So I think "working" is quite a challenging way to put it. What we want to do ideally is to facilitate trading around about the asset value of the fund, and the buyback is an attempt over time to make sure that we can try and match supply and demand to achieve that aim. So I think we've made some progress. I don't think we're yet where we want to be.
And then perhaps following on from that, the investment trust sector has been in the headlines a lot over the last couple of months, particularly the actions by the activist US hedge fund Saba Capital. So the question that we've had come in is: I'm glad that the share price is increasing and now over the one pound mark, what was the catalyst for this, and do you think you're safe from the likes of Saba?
Well, if you look at the delivered performance of Scottish Mortgage over a hundred years, what you will see is that it's volatile from year to year, and it's very difficult to say in the short term what's going to happen. But what we believe is that if we can identify the right long-term growth companies, that over time they will deliver attractive returns for shareholders. It's been a more volatile ride than we would have wanted over the past five years.
And trying to say when in that evolution that you would drive returns is very difficult. But the key for me always is to go back to fundamentals: what are we seeing at the companies? And we're seeing attractive growth rates, we're seeing improving margins, we're seeing big opportunities, and I think that's what's driven the appreciation in our asset value, and the share price has followed it.
Now, I think the way the question was put was, are we safe? And I don't see it in those terms. Instead, are we delivering for our shareholders? Because that's the question. And I think if you don't do that, anybody can buy the shares. An activist will come looking for you if you're not living up to your shareholders' expectations. And so the way I see it, we have to deliver, and it's not about safe or not safe.
Perfect, thanks, Tom. And the buyback generated a lot of questions, but probably come as no surprise, the other topic that a lot of shareholders asked in advance of the webinar was around Trump. So the very common question on shareholders' minds was around this concept of what will be the impact of Trump's administration on markets and the portfolio, and how do you see Trump impacting the Scottish Mortgage fund specifically?
For me, the most important drivers of returns are not generally to do with macroeconomics, not generally to do with politics. They're to do with big, long-running underlying changes in the structure of the economy. Now, I think what you have at the moment, not just with Trump but with the Republican clean sweep of the Congress, of the House, Senate, and the presidency, is that you're open to a wide range of outcomes.
The US political system generally drives stasis because there are so many seats of power, but you've had this sweep, and I think it allows the Republican agenda to be pushed, and we just don't know where that leads. And I think anybody that thinks they can accurately predict that is lying. So what becomes more important is: are your companies resilient? Are your companies adaptable? Can they deal with that changing environment?
And the good news there is, if I look at the portfolio, you've seen a significant increase in resilience and adaptability over the past couple of years, partly as a response to COVID. But you've seen companies grow while really controlling costs, driving free cash flow, driving margins, and I think that puts them in a strong position to deal with whatever may be thrown at them.
And we can't talk about Trump without obviously talking about Mr. Musk. And I'll lump a few questions together at this point here, Tom, but there's a very common theme here, which is around: please can you comment on Musk's recent behaviour, and if you have any concerns about the impact that will have on Tesla and SpaceX holdings? Basically, are we comfortable holding investments over which he has stewardship?
Well, the challenging thing with Tesla has been that you've seen a very strong appreciation in the stock price through the back end of last year without really any fundamental news, any fundamental change. So we put on half a trillion dollars of market capitalisation, and so the challenge for us as long-term investors is: what do you do with a stock that's appreciated that much where there hasn't really been any fundamental driver of that news?
And therefore we've made some very significant reductions to Tesla through the past few months. It's less than 1% of the portfolio today. I think there's a different calculus at SpaceX, which is our largest holding, the other company where he has a big influence.
And there, I think the changes that you're seeing in the US are likely to be pretty positive for SpaceX, because one of their biggest headwinds has been regulation. And you think for such a strategically important company for the US generally, that actually they would have a fairly clear path from a regulatory standpoint, but that has not been the case. But I think the direction of travel today is that you're going to see more deregulation that will allow the launch cadence to pick up, and that's the key to generating value in that business. So I think those are the important things from a fairly narrow Scottish Mortgage perspective.
And maybe if I stick on SpaceX, the questions I'm coming in right now on this, Lawrence, I'll come to you next, are a very similar theme, which is around: do you think it'll ever IPO? What if it doesn't? It's now shown as the largest holding on the fact sheet. How do you determine its value? So maybe some comments around SpaceX's IPO prospects and the valuation. It seems to be a common theme coming in.
Yeah, maybe starting with the valuation first. It's probably quite important to reiterate that what we're doing with our private company valuations is assigning what we think is a fair value for the asset today. And that means a few things. It means it's the estimate of if we would go out and sell the shares in this private company today, what do we think we would get for them. And that requires, as our process, a robust valuation process, but it also requires a valuation process that ensures fresh valuations.
So a lot of the time, if you look at the last 12 months, we'll have revalued our private instruments about 500 times, which gives you an idea of trying to keep pace with any changes. And there are broadly speaking three things that lead to valuation changes: there's a transaction at arm's length, there's a change in operational performance, there's a change in the public market peer group.
In the case of SpaceX, what's setting the valuation at the moment is you had a very large arm's length transaction in December, it's about one and a half billion dollars. You had SpaceX and other investors buying back shares from other investors, and so that's given us a valuation of $350 billion, and that's what's setting SpaceX's valuation.
And I think, you know, you asked about IPO. I think the key things to sort of bear in mind with SpaceX is that they're just in a very, very strong position. They can choose what they think is the best way to maximize long-term value. They don't need capital. There is huge demand in the private markets for their shares, as that tender showed at one and a half billion dollars. Operationally, they're doing very well.
You mentioned the sort of cadence of launches. I think they went from sort of 90 launches in 2023, they increased those by about 40% to around 140. So I think the question for them is: they don't need to IPO, they don't need the capital. How do they maximize long-term value creation? And I think they're going to be very resistant to giving away value early.
Yeah, maybe let's just stick on the US for now, because there was a lot of questions coming in around kind of valuations in the US market, talks of a bubble again. So Tom, the questions that we've had in this topic are around: do you think there is a bubble being created, especially in the US with the NASDAQ record highs? Do we think the US might one day face a sudden slump, much like the dot-com bubble, but possibly faster? And the key question, I guess, to follow on from that is: what precautionary measures does SMT have in place against such an eventuality? So maybe just covering that sort of topic would be great.
I think it's quite difficult to talk about valuation in aggregate for the market, and I think it tends to be easier if you break this down by sectors. And what's really been driving the US market is the Magnificent Seven, you know, this small group of very large US technology businesses. And even using a term like that is quite misleading, because actually even within the Magnificent Seven there are some different trends at play as well.
So you've had big businesses like Microsoft and Apple become truly gigantic, but partly because their valuations have moved up a lot rather than because they've grown particularly. You've had something like Nvidia where you've just seen this huge surge in revenues and profitability, and again driven it to be one of the world's largest companies. And that's quite different again from a Tesla. So I think that's been responsible for a large part of what's happened in the US.
Do we worry about it? Well, it's more again going back to: we own a very small number of companies relative to the broader market, and it's are they making progress, do we see opportunities for them, and not worry too much about where the market's going. I think one of the big drivers of value creation within the Scottish Mortgage portfolio, if you look over the past 20 years, is that we haven't worried about a top-down asset allocation.
So if you look at some of the big positions we had in Chinese companies through the 2000s and the 2010s, you know that we had a very big weighting in the US tech sector for much of the 2010s. We just don't view it through that lens. It's can you find these attractive companies, and where you find the most attractive opportunities that you think are undervalued, then you just buy those companies in size and hold them for long periods of time. So in short, no, I don't worry about the level of the market in aggregate. It's thinking about the opportunity sets.
And Tom, you mentioned Nvidia. Somebody's just written in to say the decision to reduce Nvidia appears to have been well timed. Can you tell us why you've become less bullish on the stock? Lawrence, maybe I'll ask you to take that one.
Sure. Again, I suppose context. I think one thing that's helpful with Nvidia as an example is we often talk about how returns are driven by a small number of big winners, and Nvidia is in some ways the perfect example of that. So in terms of raw upside, since we took the holding, it's gone up about 83, 85 times. The initial capital we put in was about 64 million. Because of that outlier upside, we've been able to take out about one and a half billion pounds of profit effectively, and today it's still a decent size holding, but it's a much smaller holding. We have around 500 million pounds invested.
And the reasons for that are, I think the first one would be: at different points last year, Nvidia became the world's most valuable company. It became 3.3, 3.5 trillion dollars. And when we were trying to do our scenario analysis of what is the upside from here, how do you make several multiples, that became increasingly challenging at that level and that scale to get a risk-reward that looked attractive enough for it to be the trust's largest holding.
And then I think the second reason was we were hearing from AI companies that actually there was a shift between raw compute driving future performance towards more algorithmic changes. We thought that would have an impact potentially on the level of demand over the very long run. The second one is that the cost of AI appeared to potentially be looking like it was going to change from the training stage to at the inference stage.
And Nvidia's competitive position is incredible in the training stage, but there is a little bit more reason to think that the inference stage would be more competitive. So it was those fundamental reasons and the scenario analysis that were feeding in that reduction. Now, I think a key point is: yes, we've taken down the Nvidia holding, but actually our enthusiasm and conviction about the change that generative AI can bring over the next five to ten years has probably never been higher.
And so if you look at some of those reductions, it's gone into companies that we think are going to be beneficiaries of that in a different way. It's been companies like Meta and advertising, Shopify with their e-commerce tools, and a range of different companies that we think benefit from generative AI as a toolset coming through the portfolio.
So Lawrence, one of the questions, maybe quite a nice segue from that, somebody's asked in: apart from the obvious semiconductor names, which Nvidia would be one of them, which other upstream, downstream sectors and companies are likely to be long-term beneficiaries of the current AI boom? Maybe just your thoughts on that as well.
Yeah, so the way we've tried to describe it with Scottish Mortgage is there's three layers effectively of exposure that we have. The first layer is the hardware, so that's the companies that are designing and producing the chips. It's Nvidia, it's TSMC, it's ASML. They all have very dominant positions. There's been a lot of value creation already at the hardware layer.
The second layer is the infrastructure layer. That's companies that are helping other companies use and access AI. So it would be cloud services, for example, Amazon Web Services. It would be companies that are helping the database space like Snowflake. It would also be companies like Cloudflare that kind of make up this infrastructure layer.
And then the third layer is the application layer, and that's companies that are using AI in the real world as part of their commercial products and for consumers. And there we have companies like Tesla with autonomy, you have Meta with advertising, Shopify with its e-commerce tools, and you have Recursion and Insilico where they're using AI to improve drug discovery.
And I think there are probably signs that we're getting more strong today than before that when we're going around and talking to companies that they're integrating AI into their business in more meaningful ways than we've heard before, and in more credible ways in terms of the upside and in terms of the cost. And I think there's probably an argument that there'll be a greater degree of value creation in the application side, and I think that's particularly exciting for us because we have a range of companies that are in the digital and the software space that are well placed to sort of use that toolset.
I think it's almost worth reiterating that point. You know, we're reducing Nvidia because we don't think they can continue to take the same level of supernormal profits out of the ecosystem. And for that reason, AI gets cheaper, it gets more ubiquitous. You know, the applications become more broad spread. You know, it's a huge shift, it's a 20-year change, and it's going to create massive opportunities. It's a really exciting driver of returns.
I mean, just to add, what we're seeing is the dollar cost of intelligence keeps improving, and so the ROI for those that are using the application keeps getting better. And that's why I think you're starting to see a trend where actually the impact is just growing and growing and growing for everyday companies that are using that toolset.
Thanks, Lawrence. And someone just picked up that you mentioned you've taken a lot of profits out of Tesla, taken a lot of profits out of Nvidia. Could you please explain where you put that cash to work? Tom, maybe start off with you.
Yeah, I'll pick up on one very recent purchase. We made an investment in the private company Revolut. So we think banking is an industry which has evolved only relatively slowly, and there is a huge population of people whose first experience of banking will be digital. And what's exciting, so we took a holding in Nubank, the Brazilian digital bank, partly on this basis, and now we've taken a holding in the British company Revolut.
And we think they've really understood how to provide banking as a digital service without the balance sheet exposures that have made the traditional banking industry such a difficult place both to operate and to invest in. And you can see that model getting real scale. So they're a big player here in the UK, but actually the UK is only a relatively small part of their broader business.
And when you have that massive scale, what you can do from the product standpoint, from the quality of the digital experience that you give your customer, I think it's a really interesting story. You have a really driven, determined founder who has huge ambitions for what he's trying to achieve. So that would be part of it.
Lawrence has touched on this point that investing in these companies that sit at the application layer for AI, I think that's another really interesting set of opportunities. And I don't know, Lawrence, maybe you might want to pick up on some of the international e-commerce companies that we've been investing in.
Yeah, so throughout this year, towards the start of last year, we took a holding in Sea, for example. There's a few. You start at a high level, what you see is Sea operates in Southeast Asia. You can see the connection there quite quickly. A very dynamic region of the world, very fast growing, and they're really a digital consumer platform. They started in gaming, they've moved into e-commerce.
They have probably around a 50% share of e-commerce in the region, to give an idea of that dominance. That share is probably higher than Amazon's share in the US. And they have an opportunity, you know, building on the Revolut one of what we're seeing interesting things in financial services, to offer digital financial services products to the region that hasn't been particularly well served in the past. And so that's been a particularly exciting opportunity for us.
We've also put a bit more capital to work in Coupang, a more mature e-commerce market but a really efficient logistics network that's been able to take substantial share. We've also taken a holding in BYD. BYD, I think, is a fascinating company because it provides some of the answer if Tesla produced truly great cars, but the ability to get cars of around 10,000, 13,000 that are EVs to the rest of the world, particularly to developing markets, is a huge need.
And BYD, through sort of scale and ruthless efficiency of being able to produce those cars profitably and at scale, both in the ferociously competitive Chinese market but also overseas, and so we're seeing really great progress there as well.
Okay, so let's stick in on China then, Lawrence. One of the questions that came in was: Scottish Mortgage had a huge fall in share price at the end of 2021 and into 2022, and if I recall correctly, this was blamed on overexposure in China. So what lessons were learned from this? What has been put in place to avoid similar losses in the future? And then just maybe following on from that, could you maybe just give an update on our Chinese companies? Are you overweight China, for example? So maybe just covering off a few of them would be great.
Yeah, so I think the fall in 2021-2022, three reasons: historic rise in interest rates compressing valuations, a slowdown in some of the adoption of digital products and services as COVID lockdowns ended, and I think the third was China. But I'd probably put it in that order of importance.
China exposure has come down a lot, so it's around 11%. That'll be an overweight, but it's come down a lot. And what we've tried to do is a few things. One, we've reduced overall exposure, and that's really recognition of two risks when investing in China: the first is regulatory risk, the second is geopolitical risk.
And what we've tried to do is retain some exposure because I think China still has some of the world's most interesting innovative companies. It's a market of near unique scale. You know, there are two really large consumer markets in the world, the US and China. It's a market where the companies have shown a huge ability to innovate in ways that are then copied around the world.
And you kind of see that to a certain extent, that ability to innovate unexpectedly, for example the developments we've seen in DeepSeek. And the other thing we've been trying to do is refine the exposure. So it's been recognizing there are these regulatory and geopolitical risks, but it's about making sure that if you're taking a degree of risk, that you're sufficiently compensated on the upside.
And so we tried to concentrate our exposure into a smaller number of companies that we think offer tremendous upside if they're successful, to effectively give bang for buck for that China exposure. And so today we have about nine Chinese companies. A lot of that is focused in Free, Meituan, PDD and ByteDance, all of which are at anomalously low valuations but operationally performing superbly well.
And so I think more broadly, in terms of what have we learned from China, some of that's talking about that refinement of the exposure, but I think it's also ensuring that we're building in the fact that we are in a more geopolitically volatile world, a more uncertain world. And I think that speaks to some of Tom's earlier points on resilience, and we're just having to build those through scenarios that there is a risk that things change in unexpected ways, and building that in as we think about those valuations.
So a lot of people online have picked up on DeepSeek that you mentioned. So a couple of questions coming in, which is: how does DeepSeek's low price matter? Can it transform the portfolio more broadly? So maybe Tom, just some thoughts from yourself on DeepSeek.
Yeah, so well, firstly, for those that have no idea what DeepSeek is, one of the interesting developments over the past year is these big AI models have turned out that it's quite difficult to differentiate yourself hugely in producing these things. So OpenAI is the most established provider of AI models, but whether it's Claude from Anthropic or Grok from xAI or now DeepSeek, you've had these different providers of these capabilities.
And I think that's a really healthy thing actually, because it's really competitive, and it's part of what's driving the incredibly rapid progress in the capabilities of these AI systems. So DeepSeek grabbed the headlines for a couple of reasons. Firstly, because you had this AI model that was really at the cutting edge of capabilities come from a Chinese company, because hitherto it had all originated in the US.
And so I think that's forced a reappraisal of what the geographic nature of competition in this market is. But second of all, you had a system which was capable of delivering at a much lower price point than had been available by some of these cutting edge models already.
What are the implications of all of that? Well, I think the lowering of price, or the capability that you can get per dollar, as that continues to improve, it just means much wider deployment of these systems. That you will get intelligence built into more and more of the products and services that we use.
What does it mean beyond that? I think there's the question that we've covered already about what does it mean for demand for chips. You know, there'll be more chips needed for running these systems, because if they're already at a level of affordability where we can find use cases, then we move very quickly from using chips to actually run the systems rather than to create them.
I think it changes the prospects of the big Chinese online companies, because they've been limited in their access to this technology. The services that they've had have not been as strong as their Western counterparts. If you've now seen them catch up, then they can start to deploy this at scale.
And I think it opens up the prospect as well of a model that we've seen play out in lots of other industries, where you have the tech development happen and then you see the Chinese pick up that technology and run with it and drive the price down and drive the scale up. And I think that's a really exciting dynamic.
So you just mentioned something there, Tom, which somebody's just typed in at the same time, which is staying on China: big tech, Tencent and Alibaba, no enthusiasm anymore? Maybe just a couple of comments on that area as well.
