April 2023

Investor webinar: follow-up topics

Stewart Heggie – Commercial Director

Key Points

  • While the recent Scottish Mortgage investor webinar answered investors’ questions, there was not time to answer all of them live
  • In this document, managers Tom Slater and Lawrence Burns address those unanswered questions
  • Highlights include the benefits of active investing, why a high-interest rate environment isn’t always bad news, and our lessons from the pandemic

Please see below a list of the topics which shareholders asked about, but that we unfortunately didn't have time to get to on the webinar. If you click the topic you are interested in, an in-depth response will appear below. If you have any further questions, please do not hesitate to contact us at [email protected] and member of the team will get back to you.

At Baillie Gifford, we are first and foremost stock pickers, and resolutely bottom up. Our starting point is detailed company analysis. Whilst we share some of ARK’s views on a number of long-term technological drivers, we will not invest behind those tailwinds unless we can unearth individually special companies with differentiated cultures, competitive advantages and financial characteristics.

The portfolios that result from this approach are global and they are underpinned by a range of drivers. In contrast, ARK’s funds tend to focus on individual themes.

Baillie Gifford has been investing globally for over 110 years. Our investment approach has therefore been tested and improved through a multitude of different geopolitical, technological and monetary environments.

Baillie Gifford has over 1,800 staff spanning 65 nationalities and over 230 academic disciplines. Over 130 of those staff are equity analysts, so Baillie Gifford has a substantially higher level of resource dedicated to investment research.

Baillie Gifford manages over £220bn for a global client base. The business is highly diversified by client type and geography.
Baillie Gifford is wholly owned by people who work full time in the business. The absence of any external shareholders means that:

i) We offer an exceptional level of client alignment because we have no external shareholders placing demands on us to grow the business. We will therefore only take on new clients if it is in the interests of our existing clients to do so. We have a long history of sharing economies of scale that arise from any business growth by reducing fees. By the same token, we have no issue closing to new business to protect the interests of our existing clients. The incentives of both our client-facing and investment staff are tied to our clients’ satisfaction and their long-term investment performance, not their assets under management. Long only, growth investing has been our sole focus for over a century, and we have no intention of diversifying into other areas. We have always been investment led and we will remain so. In that sense, our primary motivation is to continually improve as investors.

ii) Our structure has remained unchanged for well over a century. This exceptional level of corporate stability provides the foundations for an exceptional level of long termism. Over decades, Baillie Gifford has developed a global reputation for investing with great patience and our hold discipline is at the heart of our competitive advantage. When we deploy capital to companies, we support the visions of corporate leadership teams with a long-term view that very few other investment firms can emulate. As a result, the management teams of the companies in which we invest offer us exceptional levels of corporate access. This applies to both the private and public equity markets. Our superior access enables our investors to both evaluate corporate cultures and assess emerging companies in a way that very few other equity market participants can match. Many companies see Baillie Gifford as a shareholder of choice, and they approach us on that basis – a significant competitive advantage that has arisen somewhat by accident, but an enduring one all the same.

iii) Our independent ownership structure enables us to cultivate cognitive inputs that are very different. By positioning the investment role as one of open-ended inquisitive exploration rather than pure financial modelling, we attract and recruit investors from exceptionally broad academic and cultural backgrounds. With over 50 different academic degrees and over 40 different nationalities represented across our investment floor, our investors have a degree of cognitive curiosity and open-mindedness that is unusual, if not unique, within our industry.

It would not be appropriate to speculate on the extent to which the advantages above apply to ARK but they certainly make Baillie Gifford very different to most other industry participants.

Scottish Mortgage does not have direct exposure to Silicon Valley Bank (SVB) and has negligible exposure to banks. When we learnt of SVB’s collapse, we contacted every private company in the portfolio. We were quickly reassured by deposit guarantees by the Federal Deposit Insurance Corporation, an independent agency created by the US Congress to maintain stability and public confidence in the US financial system, and the communications from our companies that they had access to their deposits. To reiterate, at the stage in which we invest, our companies have sophisticated and diverse access to banks and typically do not rely on a singular financial institution.

At the time of writing, it is too early to say what the medium to long-term impact of the collapse of SVB will be. As an industry full of innovation and competition for business, including fintech, it seems unlikely that the vacuum left by SVB will remain unfilled for long. Traditional banks such as JP Morgan and Morgan Stanley saw inflows, and it was announced that First Citizens Bank would buy much of SVB. It will take on all the deposits and loans and operate SVB’s 17 branches. Reports suggest First Citizens Bank’s chief executive is committed to SVB’s business with private equity and venture capital firms.

There is a significant amount of undeployed capital in venture capital funds. Investors will be keen to take advantage of the opportunities that arise, possibly at lower valuations than seen recently. We don’t expect a funding drought for the best companies. Indeed, a more challenging environment could play into the hands of many of our companies, allowing them to deepen their competitive positions.

We maintain a ‘working cash’ level within the portfolio, typically around the 1-2 per cent mark. This cash is available to fund new purchases or additions to existing holdings - whether private or publicly- listed. Share buybacks are typically also funded with this cash. On 31 January 2023, the trust held 1.3 per cent of cash.

Our cash level is not imposing any constraints on the management of the portfolio. The only constraint on our ability to invest more in private companies is the 30 per cent limit, measured at the time of purchase. The portfolio has been above the 30 per cent limit in private companies for about one-third of the past year, which capped our ability to deploy further funds to private companies. We have been below that limit for about two-thirds over the past year. This fiscal year, we have deployed circa $350m into private companies.

The skew of stock market returns would argue for a passive approach to investing, were it not for the ability of an active manager to:

  1. Identify the outliers more effectively than the broader stock market
  2. Hold them for a long time, in a concentrated portfolio and without excessive trimming of the gains so that the asymmetry of returns drives larger position sizes and a more positive contribution of returns

Regarding point (1), one component of the research that we have undertaken with Hendrick Bessembinder has identified that the long-term winners have several commonly observable characteristics. Most notably, top-performing firms have rapid asset growth and, in particular, have substantial cash accumulation. Top-performing firms are more profitable on average, despite higher research and development (R&D) spending. In terms of accumulated rates of return, top-performing firms tend to be younger and have more volatile returns than ordinary firms. These characteristics are all in evidence within the Scottish Mortgage Portfolio. Further work has identified that these observable characteristics can forecast outcomes.

Firms with the highest decade-horizon stock market returns tended to be:

  • younger,
  • had larger drawdowns than the prior decade,
  • and had higher prior-decade R&D spending than more typical firms.


Firms with the worst decade-horizon stock market returns tended to be:

  • more levered at the end of the prior decade,
  • were less profitable,
  • had lower spending during the preceding decade,
  • and had more volatile prior-decade stock returns, as compared to more typical firms.


You can read more about Bessembinder’s work and how it has influenced our thinking here: Lessons from Bessembinder (magazinebailliegifford.com)


The long-term distribution of returns within the portfolio evidences our success in finding outliers. Over the past ten years (to 31/12/22), 235 holdings posted returns of between -100 per cent and +100 per cent. They accounted for less than 10 per cent of the cumulative absolute return over that period. A further 27 holdings posted returns of 100 per cent - 200 per cent. Another 27 holdings posted returns of 200 per cent to 500 per cent. And nine holdings posted returns of over 500 per cent (with the most significant returning 2,300 per cent).

With regard to point (2), it is not enough to find the outliers. Holding them in size is key. We have run several large outlier holdings up to over 10 per cent of the portfolio in recent years.

By way of illustration, the stock that returned 2,300 per cent was Tesla and its average holding size in the Scottish Mortgage portfolio over the past decade (to 31/12/22) has been circa 5.5 per cent. By contrast, Tesla’s average weighting in the index (and therefore a passive fund) has been less than 0.35 per cent. At no point has Tesla’s weighting in the global index risen above 1.4 per cent. This illustrates that the performance impact of an outlier such as Tesla is limited by the rebalancing within a passive fund. Similar observations could be made for other outliers, such as Amazon (average position size over the past decade: 8.7 per cent) and Tencent (average position size over the previous decade: 6.2 per cent). For broader context, the nine Scottish Mortgage holdings that have posted returns of over 500 per cent have collectively delivered half of the total portfolio return within the Scottish Mortgage portfolio over the past ten years. Again, this is a function of our ability to hold them in size.

As stock pickers, we don’t have any expertise in making top-down market forecasts. Still, based on a dataset spanning around 140 years of stock market history, students of CAPE (the cyclically adjusted price-to-earnings multiple) will point to a long-run average of just over 21x earnings. They’ll also flag that when long-term interest rates have notched up to the high single digits, the market multiple has commonly fallen to the low teens – and during a couple of exceptional periods (including 1981 when rates rose to almost 16 per cent), down into single digits.

While the overall market would respond positively to the prospect of ending the rate-tightening cycle, a return to the previous ultra-loose monetary conditions seems unlikely. On this basis, the historic skew of returns between stocks appears likely to persist, with aggregate valuation metrics masking an extensive range of underlying valuation distortions.

Historically, periods of economic hardship and monetary tightening can accelerate innovation, speeding up changes to complex systems and accelerating disruption. Today, there is a clear need to address evolving human needs with fewer inputs. This imperative arises not only from current economic pressures but also from our planetary boundaries. The accelerating changes within our transportation, energy, healthcare, food and commerce systems are giving rise to formidable and mispriced investment opportunities. The companies driving the changes that excite us will likely thrive regardless of when the rate-tightening cycle ends. Their operational progress is sufficiently strong that we do not require an upward rating driven by an end to the rate-tightening cycle to make a lot of money from them.

It is also worth mentioning that dead wood is burned in an environment where we see structurally higher costs of capital, making space for the green shoots of more capital efficient growth. The strong are separated from the weak, and those who survive are left more robust. As capital costs have increased, unruly companies have been required to pull back, while the disciplined outliers have been able to forge ahead and win share from those in retreat. The area of food delivery is a case in point, with Delivery Hero taking share as competitors retrench.

On the previous four occasions when inflation has spiked, the subsequent 10-year return (per cent per annum) for Scottish Mortgage provide historical evidence that high-interest rate environments have been good for stock picking:


Inflation Peak

Peak Inflation Level (CPI)

Subsequent Ten-Year Return ( per cent per annum (pa))

January 1952

9 per cent

16.6 per cent pa

August 1975

24 per cent

15.0 per cent pa

May 1980

18 per cent

21.0 per cent pa

April 1991

6 per cent

10.7 per cent pa


When assessing individual holdings, we tend to place little emphasis on spot price-to-earnings multiples because they tell us very little about a company’s intrinsic worth. We need to think more about the future cashflows generated in assessing valuation. To determine the probabilities of those flows, we need to think about top-line growth, margins, competitive advantage periods, management culture and capital allocation.

For context, though – and with all of the caveats around excessive focus on a single spot multiple – metrics such as price-to-sales, price-to-earnings, enterprise value to earnings before interest and taxes and price-to-cashflows are all sitting materially below pre-pandemic levels.

The noise in financial markets over the past 18 months has been deafening as the market tries to process inflationary concerns, interest rate rises, the war in Ukraine, climate change, supply chain issues and geopolitical tensions. Against this backdrop of uncertainty, and the subsequent volatility, it is essential to remind ourselves what the purpose of Scottish Mortgage is: identifying the small handful of companies that could drive transformational change across the world over the following decades.

We do not claim to be macro-economists or experts at timing markets. We do not attempt to ameliorate volatility through our holdings or with derivatives. Over the long term, we know that share prices follow fundamentals and because of that, Scottish Mortgage will continue to do what it has always done. The strategy has not produced a good outcome for shareholders over the past 18 months, but as we have always said, you should only invest in Scottish Mortgage if your time horizon is five years or more.

We are always looking to learn and improve as investors, and as the pandemic subsides, we have been reflecting on several topics.

We view our internal Investment Risk Team as a valuable resource. Over the past twelve months, we have undertaken some detailed work with them to unpack the key drivers of performance prior to, during and subsequent to the pandemic. One of the observations arising from this work is that the strong performance of Scottish Mortgage between 2017 and 2020 was largely down to the strong underlying operational performance of the portfolio holdings, with no overall observable effect arising from multiple expansion. From March 2020, however, the portfolio experienced a significant performance tailwind from multiple expansion – a phenomenon that ensued for around a year. The effects of that multiple expansion have now more than reversed with significant multiple compression between late 2021 and late 2022, more than offsetting the continued operational growth throughout that period. Notwithstanding our view that we have little or no edge in trying to time the market, we have been reflecting on whether we could have taken more action regarding recycling capital following the period of multiple expansion during 2020.

We have asked ourselves whether the pandemic has structurally expanded the addressable opportunity for each holding or simply pulled forward future demand, leaving a smaller runway for growth from here. This consideration is particularly relevant to the handful of holdings whose operations were ‘turbocharged’ over 2020 and 2021 – the likes of Zoom, Shopify, Moderna and Netflix, for example. In Moderna’s case, we are increasingly confident that the structural opportunity has expanded materially since Covid-19. For Zoom, Shopify and Netflix, meanwhile, the considerations are more finely balanced, which is reflected in their relative holding sizes within the portfolio.

The third point relates to corporate culture. Some holdings have culturally blossomed in the light of Covid-19 and the subsequent challenges of a more demanding operating environment. Dutch payments company Adyen is a good case in point. Other companies are struggling somewhat in terms of both strategy and execution. In such instances, we need to balance engaging with the companies to help them navigate through challenging post-pandemic normalisation and moving on when we don’t see the progress we’re looking for.

As the managers acknowledged in the webinar, for the Chinese holdings in the portfolio, we were a little slow to recognise and respond to the changing dynamic between the Chinese government and some of the larger internet platform companies and the extent to which a more robust regulatory backdrop would stifle returns. From here, we are focused on monitoring signs of weaponised interdependence between the world’s largest superpowers. Technology is central to this clash, with the US and China focusing on similar areas. This creates a dynamic competitive landscape for western companies such as NVIDIA and ASML in advanced computing and Tesla in electric vehicles (EV). We continue to elicit external perspectives as we calibrate the balance between downside risks and upside opportunities.

We have considered how we assess competitive advantage in an environment where we see structurally higher costs of capital. At times like this, deadwood is burned, making space for the green shoots of more capital efficient growth. The strong are separated from the weak, and those who survive are left more robust. This differentiation between the healthy and the brittle is the overlooked positive consequence of a higher cost of capital.

When money is cheap, companies tend to spend first and ask questions later. In such environments, companies find it hard to maintain high capital allocation hurdles and a sense of direction about what not to invest in. When markets don’t force this discipline, it requires exceptional independence of mind and strategic clarity to exercise restraint. As capital costs have increased, unruly companies have been required to pull back, while the disciplined outliers have been able to forge ahead and win share from those in retreat. So, within food delivery, Delivery Hero is taking share as competitors retrench.

Finally, we also reflect on how we assess capital discipline more broadly. We have been evaluating whether any holdings have an unhealthy reliance on stock-based compensation. We have been working with our Investment Risk Team to assess cash burn rates and cash runways for holdings that are not yet profitable. This is especially relevant for early-stage growth stocks, including our private holdings.

As a reminder, our private company exposure is weighted towards the upper end of the maturity curve, focusing on late-stage companies that are scaling up.


Cap Total Equity Value (USD) Portfolio % Number of Holdings





















12 months to 31 December 2022. *Private companies purchased after 1 January 2022 may not have been revalued 3 times.

One of the greatest perils of cheap money is that it can drive somewhat frenzied deal flow within the private markets, so stock pickers must remain highly disciplined and selective. This applies not only to Scottish Mortgage but also to Baillie Gifford as a whole. By way of context, in recent years, Baillie Gifford has invested in 38 of the 687 opportunities that have arisen from proprietary sources (a 5.6 per cent hit rate) and 10 of the 1,387 opportunities that have arisen from non-proprietary sources such as investment banks (a 0.7 per cent hit rate). Scottish Mortgage invested in a subset of that cohort – so we have remained highly selective.

From a valuation perspective, we have also been testing the resilience of the portfolio holdings to a period of prolonged economic challenge and structurally higher rates. Our valuation cases must be driven by strong operational progress rather than the requirement for an upward rerating in multiples from here. In other words, we see the potential for substantial returns for minority shareholders in the absence of multiple expansion and even if multiples compress further from here.

The trust’s liquidity policy can be found in the annual report. The board recognises that it is in the long-term interests of shareholders to manage discount/premium volatility. While the primary driver of discounts over the long term is investment performance, the relationship between the trust’s net asset value (NAV) and share price can be impacted in the shorter term by market sentiment. The board does not have formal discount or premium targets at which shares will be repurchased or sold, as it believes that the announcement of specific targets will likely hinder rather than help the successful execution of the liquidity policy. However, it can and does carry out buybacks to aid the efficient functioning of the market in its shares in normal market conditions. In the 12 months to 23 March 2023, Scottish Mortgage repurchased over 36 million shares.

Tom Slater and Lawrence Burns are both partners of Baillie Gifford. As such, each receives a base salary and a share of the partnership profits from Baillie Gifford. As with all the firm’s partners, their share is a percentage of the total partnership profits based on seniority, their role within Baillie Gifford, and their length of service, and is set by the firm’s Senior Partners. In this respect, their remuneration is oriented towards long-term contributions to both investment performance and the firm overall.

Tom Slater and Lawrence Burns have disclosed that they each have significant personal investments in Scottish Mortgage. Consistent with our peers, we disclose details of the Managers’ personal holdings in the biennial ‘Skin in the Game’ report compiled by Investec. Additionally they are reported to Baillie Gifford’s compliance department to comply with regulations.

At the end of March 2023, Baillie Gifford partners, staff, and their connected persons cumulatively held just under 9.5 million shares in Scottish Mortgage. This is spread across approximately one-third of the people working for Baillie Gifford.

It is important to reiterate that we are not early-stage venture capitalists. The private companies we invest in are multi-billion-dollar companies. The following table splits out our private portfolio based on size to demonstrate this:


Cap Total Equity Value (USD) Portfolio % Number of Holdings





















12 months to 31 December 2022. *Private companies purchased after 1 January 2022 may not have been revalued 3 times.

A private company usually raises seed funding followed by Series A, B, and then C. Over 75 per cent of Scottish Mortgage’s private investments have been either ‘Series C’ or later. Typically, a company will have already received material validation by Series C. For this reason, it is often seen as the point where companies raise material funding to scale a business. Nearly 90 per cent of the total amount invested by Scottish Mortgage into private companies has gone into companies already generating revenue. Moreover, approximately 18 per cent of the current private company portfolio is cash generative. Therefore, the private companies we invest in have far more in common with the growth companies of public markets than a startup.

As with our publicly listed portfolio, we continually reassess the investment case for our private holdings. Our approach is consistent, and we will provide capital support to companies where we have continued or increased conviction in their potential for upside. If our conviction has abated, we will decline to participate in follow-on financing.

As long-term investors for whom IPO does not automatically mean exit, we assume that our ultimate exit route will be via sale in public markets. Over our investment time horizon, we expect many of the private companies held to have listed. Any companies still held privately may be exited in the secondary market. We could utilise several brokers for shares in private companies, although we have yet to use this route to exit holdings. Given the size and maturity of our companies, we expect the market to be active and liquid.

Scottish Mortgage is a closed-ended vehicle meaning that we are not forced sellers of private companies.

Full lists of the promissory notes can be found in the holdings section of the website www.scottishmortgage.com. Promissory notes made 0.9% of total assets as at 28 February 2023.

Promissory notes are a form of lending, essentially a convertible note. They are used in a variety of ways. Often they are used as a bridge to the next equity round, where it can be quicker and cleaner for the company to raise a promissory note if they decide they need capital. These notes sit above equity in the capital structure so provide Scottish Mortgage shareholders with more security. The notes we hold would convert into equity at a discount to the value of the next funding round.

Shareholders will find the most up-to-date portfolio data and insights on our website: scottishmortgage.com. We publish a monthly factsheet, a monthly portfolio valuation, a quarterly voting disclosure, and annual and interim reports on the website. We don’t publish valuation metrics; however, they are available on third-party websites such as the London Stock Exchange.

We do not disclose financial data related to specific private companies. We work with our private holdings to try as best we can to balance the transparency that shareholders require with the interests of the investee company.

Stock specific

We retain enthusiasm for the large-scale opportunity associated with disrupting the consumer credit market. Affirm, specifically, continues to show strong progress at the top line. The gross merchandise value (GMV) being processed on the platform and the number of users are up 30-40 per cent year-over-year. There is no sign of churn at Affirm’s big partners, which is also encouraging. Affirm’s underwriting discipline remains strong (<3 per cent in 30+ days delinquent), and the loan book has no significant duration mismatches.

On the flip side, though, we have observed that the quality of the growth is lower. Both take rates and margins are falling, partly due to rising interest rates. We know the Affirm business model can still cope at current rates (or 1-2 per cent more), but we don’t think it could cope with a 10 per cent Fed Funds rate, for example, so we are watching it closely in this regard. From a cashflow perspective, the burn rate looks manageable in the near term. Plenty of equity and short-term liquidity is on the balance sheet, but we are keeping a close eye on that situation.

From a valuation perspective, there is scope for plenty of upside from here (paying $3bn for $1.6bn of revenue and $22bn of GMV looks pretty reasonable). We have no concerns about the responsibility of Affirm’s approach to lending (it does not charge late fees and has been strong advocates of more regulatory oversight within the sector), but the broader travails within the financials have been unhelpful in the near term. Affirm must operate quite defensively in the current environment. We do harbour some questions about whether the growth opportunity for Affirm remains significant enough for the company to warrant a position within the portfolio. We are continuing to monitor the situation.

There is clearly a lot going on with Alibaba’s restructuring at present and key details are not yet available. The recent announcement of Alibaba’s restructuring into six entities does not include any discussion of their 33 per cent stake in Ant. For Ant Group specifically, the outlook seems to have improved significantly with Jack Ma relinquishing control, taking it a step closer towards becoming a financial holding company. This is seen as the final element in enabling it to come back to the markets with an IPO. Ant received approval from the China Banking and Insurance Regulatory Commission earlier this year to expand its consumer finance business, which was seen as marking a turn in the previously frosty relationship with the regulator. Although we’ll need to await further details on the restructuring of Alibaba’s constituent businesses, we remain upbeat on the prospects for key business areas as China’s economy begins to recovery after a couple of tough years under Covid-19 lockdowns.

This article provides a high level overview of why ASML is unique, and the importance of the company to the future of computing: ASML: advancing semiconductor chips | Baillie Gifford

The key points of discussion of late have related to a few areas:

Supply and demand: ASML is supply-constrained, albeit in a self-imposed way, which helps it to steadily grow despite the cyclicality of the industry. Meanwhile, ASML also helps to ensure a pipeline of demand by instituting a down payment for its extreme ultraviolet lithography (EUV) systems of 25-30 per cent, and requiring customers who cancel their orders to go to the back of the queue (which would set back their delivery date by up to 2 years). In addition to EUV, demand for earlier generation deep ultraviolet (DUV) machines is holding up very well. The evidence then, is that EUV technology has not therefore cannibalised ASML’s DUV business yet; it has proved to be additional.

Beyond EUV: Whilst EUVs allow customers to make the giant leap to 3 nanometre (nm) nodes (and even 2nm when coupled with architectural changes), the next steps will be more incremental. Reaching 1nm will involve both EUV in combination with the forthcoming high numerical aperture (High-NA) EUV machines which could be extremely important in unlocking further demand and extending upgrade cycles farther into the future. A $1tn market by 2030 seems plausible on the demand side.

Importance of Moore’s Law from here: We have seen a one-million-fold increase in machine learning workloads over the past decade. While shrinkage via lithography has played a role in that progress, alternative architectures and software have also played a role. ASML suggests that shrinkage could continue for another 10-15 years. Its long-term academic bets (on aspects such as aperture, optics, lasers, etc) could potentially yield another massive breakthrough like EUV. But even without more shrinkage at that point, ASML could still have a solid business model in integrating new materials, improving yields, establishing customer needs in fab design and so on.

Customer Relationships: Crucially, ASML is deeply embedded with its customers – not least the factories of TSMC and Samsung. This means that ASML has a unique understanding of customer requirements. Even in the unlikely absence of radical innovation from here, ASML’s position enables it to innovate incrementally thanks to the insights that it derives from its deep relationships with its customers.

Geopolitics: This is a sensitive industry, US regulations now severely limit selling high-end equipment to China, and TSMC’s position needs to be monitored based on China’s relations with Taiwan. While geopolitics are spurring China to develop its domestic semiconductor industry, the country appears to be 10 years or so behind in terms of EUV development. Even without selling to China, there is still a vast opportunity for ASML within computing and AI. Moreover, more tech sovereignty and onshoring are likely to spur more demand for ASML equipment in more geographies. That demand could easily offset the loss of sales to China (around 15 per cent of DUV sales). There is, however, a question mark over the second and third order effects of DUV buyers’ own markets in China. We do not have full transparency of ASML’s 4,000 suppliers, but the critical components have long exclusivity arrangements with ASML.

Valuations: The extent of the recent drawdown in the share price feels surprising. It is easy to articulate ASML’s upside case from here, particularly as the company forecasts to 2030 and has a history of being conservative in its forecasts. Even if one holds lithography intensity and customer capex constant, it’s easy to construct a 3x case over the next 8 years or so, and that’s not accounting for dividends or buybacks (which are quite considerable for this company).

High level estimates suggest that annual cobalt production will need to grow 450 per cent by 2050 to underpin a 2C climate scenario. The main issue with cobalt now relates less to supply constraints (which have eased considerably over the past couple of years), and more to governance. We have been monitoring the overlapping industry initiatives that aim to conduct effective due diligence on suppliers of cobalt and other high-risk minerals. The most mainstream is the Organisation for Economic Co-operation and Development’s (OECD) Due Diligence Guidance. Tesla is also a member of the Responsible Minerals Initiative (RMI) whose RMAP Standards are used to audit cobalt refiners against the OECD’s framework. Over the years, we have engaged extensively with Tesla on the topic of cobalt supply and the company now incorporates a significantly improved level of detail in its annual impact report. From a human rights perspective, Tesla requires any new suppler to conduct ongoing annual third-party audits in accordance with OECD Guidelines, and also conducts its own inspections of cobalt refiners to ensure ongoing compliance.

In the medium term however, technological advances in battery production could have significant (positive) bearing on EV supply chains that might reduce the need for cobalt. Elsewhere within Baillie Gifford, we hold Chinese battery maker CATL, whose lithium-ion phosphate (LFP) cells are proving increasingly attractive to EV makers for their safety characteristics, long lifecycle and abundant raw material supply (iron and phosphate). They contain neither nickel nor cobalt, so are more attractive from an ethical standpoint too. Volkswagen and Ford are among the large automakers partnering with CATL to produce LFP-powered EVs. LFP cells, of which CATL has circa 60 per cent market share, are becoming the chemistry of choice for low-end high-volume EV production. The lithium iron phosphate batteries that Tesla uses in China (produced by CATL) are already cobalt-free.

Much of the lithium mined by Tesla comes from Australia and Argentina, and the company is exploring sourcing lithium from the US too. CATL is looking at solutions that require less lithium, such as sodium ion. This could be accelerated if bottlenecks in lithium supply are further exacerbated. Lead times (approximately10 years) mean that even if all current projects come on stream by 2030, if the EV market grows 10x, there will be a lithium shortage, and CATL may be uniquely placed to provide an effective combination of lithium and sodium.

In the long term however, we can expect an increasing proportion of the necessary minerals for battery production to be recoverable through recycling without the need for new primary supply. Scottish Mortgage holding Nothvolt has already made history by manufacturing the first ever lithium-ion battery cell using 100 per cent recycled nickel, cobalt and manganese in 2020. It aspires to build a circular model, with over half of its upstream materials to be recycled from its previous batteries by 2030. Nevada-based Redwood Materials, another private holding (led by Tesla co-founder and former chief technology officer JB Straubel) is also focused on the recycling of battery materials, so we see exciting long-term opportunities in that regard. The battery-swapping stations in China championed by Scottish Mortgage holding NIO are likely to be conducive to more efficient battery recycling, as they imply B2B recycling instead of B2C2B recycling.

In terms of iron-air batteries, we continue to monitor technological developments and how they might impact the future of energy. We have also been continuing to research the potential for hydrogen-powered fuel cells.

We view blockchain as being a nascent and evolving technology that could greatly reduce friction and cost, and increase trust across a wide range of industries.

We have invested in blockchain related companies in a number of ways and our investments in this domain are helping us to assess both the threats and the opportunities for existing Scottish Mortgage holdings such as Wise. These investments include Blockchain.com which is aiming to become the leading investment bank dealing with crypto assets. This has not been a successful investment to date, hit by falling crypto prices and the subsequent failure of the Celsius Network and the Three Arrows hedge fund. Blockchain.com had very limited exposure to FTX and investment exposure is mitigated to an extent by our ownership of preferred shares which carry enhanced liquidation and voting rights to protect the fundamental economics of our investment. Reputational exposure is managed through our analysis of the businesses themselves, their founders and the company culture. This led Baillie Gifford to decline the opportunity to invest in FTX when offered the chance in late 2022.

Baillie Gifford hasn’t invested in crypto currencies as assets in their own right, partly because it is impossible to assess what a fundamental basis of valuation is. Bitcoin has built up a level of trust as it becomes more widely accepted, but it is still vulnerable to regulation, technology changes, and concerns over security and valuation.

In the case of Illumina, we have a high level of conviction in the contention that the ever-improving understanding of genomics will underpin the future of healthcare. The long-term opportunity is vast and Illumina remains the market leader in next generation sequencing. With more than 20,000 installed machines, the company benefits from a combination of high accuracy and customer trust. Illumina retains a leading position in terms of supporting infrastructure and the company has several long-term supply agreements in place. However, this is a time of increased competitive pressure within the industry. We have spent considerable time assessing some of Illumina’s competitors. They include the likes of Ultima Genomics, long-read sequencing company Pacific Biosciences and cancer-screening company Guardant Health. We continue to monitor these dynamics closely. We are of the view that there is a strong core business within Illumina but there are some interesting strategic considerations, one of which relates to the long-term margin structure of companies in this area, another of which relates to the future of liquid biopsy company, Grail. We continue to engage with the management team on that front. Late last year, we trimmed the position in Illumina in the context of these questions and we continue to engage with the management team regarding Grail. Given the sensitive backdrop, we will share more background on our thoughts in due course.

While Ocado enjoyed a short-term boost during the pandemic, it is important to stress that a vast runway for growth from here remains. At the end of 2022, Ocado had 19 customer fulfilment centres (CFCs) in operation, with plans to open dozens more. The global grocery market was worth more than $11tn in 2021 so even if Ocado succeeded in getting 1,000 CFCs up and running, it would still account for less than 5 per cent of that sum.

This article (six-minute read) gives a high level sense of the opportunity: Ocado’s robot retail revolution (scottishmortgage.com)

This podcast (52-minute listen) delves into more detail: Invest in Progress: Ocado | Scottish Mortgage

Scottish Mortgage has made some venture fund investments which we believe have the potential for outsized returns, but where we also want to gain exposure to or learn more about specific areas of interest, particularly in early or seed stage investments which Baillie Gifford is not set up to access directly. These include fund investments in Antler East Africa Fund I for early-stage African exposure, a number of ARCH Ventures funds (biotechnology), Innovation Works (software, hardware and life sciences), Sinovation Fund III(China) and WI Harper (US and China.)

Zoom’s revenue has grown more than tenfold over the past three years, with a commensurate explosion in its enterprise customer base – from less than 50,000 to over 200,000. But as the pandemic subsides, Act One is over for Zoom. Its growth trajectory will never see a repeat of 2020 and 2021 and we’re seeing a proliferation of video conferencing solutions that ’just work’. So, from an investment perspective, we need conviction in a compelling next leg of growth. Zoom could unlock that upside partly by monetising of a very large free user base, but perhaps the more exciting angle is the opportunity to upsell of more products into its enterprise customer base. In that vein, it’s encouraging to see that Zoom’s product engineers have been busy – building 1,500 new features and enhancements in the last year alone. By way of example, it’s developing the ability for users to have multiple co-working spaces ’live’ on their screen. The company is considering how to replicate its services on the move (a partnership with Tesla enables video calls in the car). It’s developing machine learning capabilities to seamlessly integrate different languages. It’s also thinking about the potential within contact centres. People aren’t calling 1-800 anymore and if a customer problem can be diagnosed and solved visually then a company can save significant money by not having to send someone out to troubleshoot in person. As an extension of this, ‘Zoom IQ’ is being developed to analyse sales calls and extracting insights on how sales reps are performing. Other industry specific solutions are being developed, with a big focus on legal and medical applications.

Zoom’s ultimate goal here is to develop a single platform and its ’ZoomOne’ bundle replicates a broader trend in the world of enterprise software. The likes of Microsoft and Adobe continually add features and encourage users up their price curve. From here it’s not hard to imagine Zoom continually adding features and enhancements to its bundle, seeking to take prices higher in the years to come. Founder and chief executive Eric Yuan is part of the ’secret sauce’ here. His infectious enthusiasm and desire to outpace others on innovation represents a major attraction for the engineers. Zoom’s innovation pipeline looks sufficiently compelling to make the post pandemic air pocket worth riding out. It’s worth remembering that the financial characteristics of this business are phenomenal with superb returns on capital, a strong balance sheet and excellent cash generation.

In our view, the current valuation doesn’t reflect the levers of innovation at the company, but we are conscious that the competitive backdrop is very dynamic, not least due to emergent machine learning tools such as Chat GPT. We are monitoring this area closely.

Multiple lines of investigation will be underway at any point in time. Here is a handful of current examples:

  • Pattern shaping technology and its potential to replace EUV lithography in chipmaking
  • The implications of data privacy changes for the future of online advertising
  • Changes to ecommerce fulfilment in a world of just-in-case supply chains
  • Ad-supported streaming content
  • Micropayments in online gaming
  • The evolution of Federal Aviation
  • Administration regulation as applied to electric vertical take-off and landing
  • (VTOL) air transport
  • The interface between underlying growth and rerating as applied to stock market valuations
  • The evolution of Latin American financial services
  • Sino-American relations
  • The future of protein consumption
    Solar value chains

At Baillie Gifford, we have been exploring opportunities within this area for over a decade. We have researched and held historically shares in several 3D-printing companies, including Stratasys, Arcam and Materialise.

The scale of the potential opportunity within this area has always seemed abundantly clear, but within the listed sphere, we have struggled to find ‘pure play’ 3D-printing companies with an enduring competitive or cultural advantage despite conducting research across the value chain (from raw materials input to the machines themselves).

That said, we have also seen manufacturing related companies in the portfolio increasingly making use of 3D-printing technology, with Tesla being one of the most notable examples. We have also researched the software ecosystem around additive manufacturing, and we continue to keep a close eye on the likes of Autodesk.

Relativity Space, a private holding within the Scottish Mortgage portfolio, is building the first autonomous rocket factory and launch services for satellites. They are using 3D-printing technology extensively to produce Terran 1, which became the world’s first almost entirely 3D-printed rocket to reach space after its successful launch in March. Relativity’s Stargate printers’ patented technology enables an entirely new value chain with no fixed tooling, dramatic part count reduction, faster design and component iterations and real-time quality control.

Carbon, another private holding, has pioneered a method which uses light and oxygen to rapidly produce products from a pool of resin. This patented technology, including CLIP (Continuous Liquid Interface Production), makes 3D-printing cheaper, faster, more versatile: in short, significantly better. Carbon makes money by selling its polymer 3D-printing machines on multi-year subscription contracts and its proprietary resins. Carbon's foundation in chemical science means that it can produce materials mechanically superior and diverse to pre-existing polymer resins at far greater volumes and faster speed than competitors and its technology spans dentistry, ophthalmology and consumer electronics. It has partnered with Adidas since 2017 to print high-performance soles for trainers and more rapid product development. The upside opportunity is tremendous: industrial manufacturing is a $12tn market but it remains to be seen whether Carbon can successfully scale up over time.

The investment philosophy of Scottish Mortgage lends a portfolio skew towards stocks that have more of their potential value in the future (in contrast with, say, oil companies whose current earnings may be high but whose future earnings are likely to diminish sharply). When faced with higher interest rates, the stock market sees an imperative to discount future cash flows at a higher rate, so conventional wisdom dictates that the multiples applied to future earnings streams should compress in a more inflationary environment. Much of the recent volatility can be explained by this phenomenon.

It is also worth highlighting that companies with a very long-term focus on changing industries tend to be more volatile because they are investing for the long term andhave little interest in trying to smooth short-term earnings. Recent work undertaken by our Investment Risk Team illustrates an almost uncannily linear relationship between volatility and long-term returns. The highest-returning stocks of the last decade within the stock market have been the most volatile, but this has little to do with their intrinsic risk.

Scottish Mortgage Annual Past Performance To 31 December each year (net %)

  2019 2020 2021 2022 2023
The Scottish Mortgage Investment Trust PLC 24.8 110.5 10.5 -45.7 12.5


Source: Morningstar, share price, total return, sterling.

Past performance is not a guide to future returns.

Risk factors

The trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.

The trust has a significant investment in private companies. The trust’s risk could be increased as these assets may be more difficult to sell, so changes in their prices may be greater.

The trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.

The trust can borrow money to make further investments (sometimes known as “gearing” or “leverage”). The risk is that when this money is repaid by the trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the trust will make a loss. If the trust's investments fall in value, any invested borrowings will increase the amount of this loss.

The trust can buy back its own shares. The risks from borrowing, referred to above, are increased when a trust buys back its own shares.

The trust can make use of derivatives to obtain, increase or reduce exposure to assets and may result in the trust being leveraged. Derivatives are most often used to compensate for possible unfavourable currency and market movements. This may result in greater movements (down or up) in the net asset value of the trust. It is not our intention that the use of derivatives will significantly alter the overall risk profile of the trust. A further risk exists in respect of the counterparty with whom the derivative transaction is made. Due care and diligence is exercised in the selection of counterparties, however, the possibility of the counterparty failing to pay sums due to the trust still remains.

About the author - Stewart Heggie

Commercial Director

Stewart Heggie is a commercial director, focused on serving the needs of Scottish Mortgage shareholders. Prior to joining in 2019, he spent 15 years as a discretionary fund manager, before which he helped design the investment platform of a large UK bank. Nowadays, Stewart enjoys a varied role that spans across several areas involved in running a listed investment company. He plays a key role in developing the company’s strategic direction and broadening out its ownership. Beyond that, he works closely with the managers to maintain current portfolio knowledge; regularly meets with potential and existing overseas shareholders; and acts as a key contact for the board of directors.

Important information

This communication was produced and approved at the time stated and may not have been updated subsequently. It represents views held at the time of production and may not reflect current thinking.

This content does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA.

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