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The solid-sounding name Scottish Mortgage belies the feisty nature of this investment trust with members of the FTSE 100.
The portfolio does not consist of loans to Scottish homeowners. Rather, it is a bet on innovation in AI (artificial intelligence) and other areas in the US, Europe and China.
Scottish Mortgage’s largest listed companies include tech giant Nvidia, maker of AI microchips, and ASML, the Dutch group, the number one in the production of machines that make microchips.
Scottish Mortgage is a long-time Tesla holder and has seen its shares soar, but other disruptive bets have failed to pay off recently
More controversial is the unlisted ‘private equity’ element of the trust, which makes up around 27 percent of the portfolio. Some investments are unclear. Others are world famous such as ByteDance, the Chinese owner of TikTok and Elon Musk’s SpaceX.
These companies excite many investors. But they do not impress the holder of 5 percent of the trust’s shares: American activist investor Paul Singer, boss of the hedge fund Elliott Investment Management and veteran of the fight against the boards of drug group GSK and others.
Singer may own the Waterstones bookstore and was the owner of the AC Milan football club until 2022. But the 79-year-old doesn’t seem to want to spend his time on such pursuits, as he is more interested in forcing change at the companies he invests in.
Scottish Mortgage’s other investors should now be asking themselves whether they like the strategy Singer wants the trust to pursue – because he could succeed.
Baillie Gifford, the manager of Scottish Mortgage, is known for having the courage to stand out for his beliefs.
Some call the attitude ‘arrogant’ and even ‘cult-like’. But Singer can be very convincing. This is the man who seized an Argentinian ship to force the country to pay off maturing bond debt.
Singer argues that Scottish Mortgage should buy back its own shares, a mechanism that aims to increase the share price and reduce the discount between the price and the trust’s NAV, its net asset value.
A reduction in the discount would be welcome. But to achieve this it may be necessary to sell some of the listed shares, increasing the stake in the more illiquid unlisted companies.
Downsizing these privately held companies would be a challenge. Normally, some would proceed with an IPO and become publicly traded companies. But currently there is less activity in this part of the market.
To dispose of these interests in any other way risks robbing the trust of some of technology’s future stars.
This opportunity to be a small venture capitalist by backing such companies is one of the reasons why I have been putting a small amount into Scottish Mortgage every month for over a decade.
But this is an adventurous choice, suitable for people who like to have a long-term vision.
The trust’s shares have nearly halved since their peak in the fall of 2021, and there’s no guarantee Singer’s intervention can reverse this trend anytime soon.
If you prefer something with a lower risk profile, there are many other global trusts, such as F&C, that also offer some exposure to the AI industrial revolution.
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