Scottish Mortgage Investment Trust PLC (LSE:SMT) has doubled down on unquoted investments, despite criticism of the growth-focused fund’s growing appetite for private, unlisted securities.
The Baillie Gifford-run trust deployed approximately £74 million into six private companies in the first half of the financial year, while one of its private holdings, the beauty company Oddity, went public.
Alongside investments in Elon Musk’s Space Exploration Technologies Corp, Swedish battery developer Northvolt and Chinese IT company ByteDance, the trust made follow-up investments in Stripe, Blockchain.com and Databricks, none of which are based in the UK.
In total, unquoted investments now comprise 35% of Scottish Mortgage’s net asset value (NAV).
Despite manager Tom Slater’s enthusiasm, unquoted investments have been blamed for Scottish Mortgage’s persistent discount to NAV.
In the six months to September 30, private company valuations fell by 0.5%, while the average write-down per underperforming company was 36.9%.
Over five years, the total return on private and previously private companies was 26.7%, nearly half that of the overall return of 51.9% for Scottish Mortgage’s entire investment portfolio.
However, when looking across the 10-year period, private and previously private investments have outperformed, netting total returns of 500.5% compared to the wider portfolio’s 327.7%.
Credit: Scottish Mortgage
“Scottish Mortgage was once the market’s leading investment trust, with great clamour to own its shares, but market dynamics have shifted and having large exposure to unquoted companies went out of fashion,” AJ Bell’s investment director Russ Mould today stated.
“The big fear stalking Scottish Mortgage is its unquoted holdings would see their value marked down aggressively.”
Yet this sentiment is unlikely to deter Scottish Mortgage.
“Market scepticism around the performance and valuation of our private assets is misplaced, and we believe they will be a significant source of value creation for the Trust in the coming years,” it said in today’s trading update.
Perhaps criticising Scottish Mortgage’s love of unquoted securities is a distraction from another potential crisis.
ASML competition ramps up
ASML, the Dutch multinational semiconductor equipment supplier and Europe’s most highly valued tech company, constitutes Scottish Mortgage’s single largest holding at 7.3% of total assets.
ASML is a uniquely placed tech giant, with essentially a monopoly on the photolithography machines required to manufacture the world’s most cutting-edge microchips.
According to Moody’s, ASML commands more than 80% of this highly specialised market, with key customer including all three of the largest semiconductor foundries: Intel Corporation (NASDAQ:INTC), Samsung Electronics (KRX:005930) and Taiwan Semiconductor Manufacturing.
However, ASML’s dominance has recently been challenged by Japanese tech multinational Canon Inc.
According to Canon patriarch Fujio Mitarai, the group intends to produce chipmaking equipment at a fraction of the price of ASML’s incumbent kit.
Mitarai recently stated that the new nanoimprint technology developed by the Tokyo-based company could enable smaller semiconductor manufacturers to produce sophisticated chips, a field currently dominated by the rarified few mentioned above.
“The price will have one digit less than ASML’s EUVs (extreme ultraviolet),” he said.
If ASML’s monopoly does start to be challenged, Scottish Mortgage may be forced to reassess the Dutch firm’s significant portfolio weighting.