Tom Slater: Manager Review

As with any investment your capital is at risk.

The year just passed has been one of compounding progress despite a disorientating backdrop. Markets remain volatile. Interest rates are high, confidence remains fragile, and economic uncertainty endures. But beneath the surface noise, the companies we back have, in many cases, delivered quietly impressive operational results. They have grown more resilient, more disciplined, and in several cases, more profitable.

This wasn’t inevitable. Two years ago, many of the businesses we own faced sharply higher funding costs and less forgiving public markets. The most ambitious took those signals seriously. They cut back on headcount growth, refocused on their core strengths, and made the kind of long-term decisions that only become obvious in hindsight.

As the environment has stabilised, these companies are emerging stronger. Margins have widened. Free cash flow has accelerated. Many of the themes we’ve followed for a decade such as digital platforms, AI, electrification and personalised medicine are translating into tangible results.

The Rise of AI and the Shifting Shape of Value

Few developments this year were more consequential than the rise of generative AI. The conversation has moved quickly from theory to practice. We see its impact most clearly in software engineering, where productivity is already rising dramatically.

This matters because software sits at the core of the modern economy, and many of our companies are already putting these gains to work. Several have increased output without increasing engineering headcount. Others have launched new products with surprisingly lean teams. AI is not a distant promise. It is driving real operational leverage today.

How should we, as investors, respond to such a powerful, yet hard-to-quantify force? Our largest holding at the start of the year, NVIDIA, sits at the heart of the current AI boom. Its dominance in training large AI models is unmatched.

However, to be truly transformational, we believe AI must become ubiquitous—and that implies commoditisation. A world built on $70,000 chips and 60% margins may not be sustainable. As a result, we chose to reduce our position significantly over the year. This does not reflect diminished respect for the company. It reflects our long-held discipline: we seek asymmetric outcomes. And at the prevailing valuations, the risk/reward looked more balanced than we prefer.

Conversely, we added to companies that will benefit from the broader adoption of AI tools. Meta has rebuilt its business with greater efficiency, while embedding AI more deeply into its product and advertising stack. It has many opportunities to drive its revenue growth today using this technology. Last year the company noted an 8% increase in time spent on Facebook as a result of AI driven content recommendations to its users. The performance of its stock reflected that progress.

Spotify, likewise, is emerging as one of the most efficient scaled platforms in the world using AI to personalise content discovery, improve advertising targeting and, potentially, to create a broader content ecosystem. Both were among the strongest contributors to returns.

We initiated a new position in TSMC, recognising that compute demand will remain structurally strong as AI moves from the training phase to deployment at scale. The appetite for semiconductors across datacentres, vehicles, devices and infrastructure continues to grow. TSMC has solidified its leadership in the global semiconductor foundry market as competitors such as Intel have stumbled.

Resilience as a Strategic Advantage

In an environment defined by unpredictability, resilience is not a secondary virtue; it is central to long-term success. We are increasingly convinced that the companies most likely to endure and thrive are those capable of adapting. This means not just those with strong balance sheets, but with leadership teams willing to evolve, reallocate capital, and make difficult decisions without losing sight of their long-term mission.

This year brought a fresh reminder of how interconnected, and vulnerable, the global system has become. Just after our financial year end, the United States announced sweeping new tariffs on several of its key trading partners. The reaction from markets was immediate and severe.

We are cautious about leaping to conclusions, but we do not view these developments as transitory. The underlying imbalances in the US and global economy whether in trade, debt accumulation, inequality or political cohesion are increasingly unsustainable. As Herbert Stein’s Law famously states, “If something cannot go on forever, it will stop.” It appears the current administration is accelerating that moment of reckoning.

Equity markets offer no hiding places in such a landscape. Few companies will be unaffected by a reordering of the global trading regime. What matters is how they respond.

Our task as investors is to seek out businesses with the adaptability to recalibrate and the cultural foundations to withstand disruption. In this context, resilience becomes not just about enduring shocks but learning from them and emerging stronger.

Several of our portfolio companies exemplify this mindset. Amazon, having invested heavily during the pandemic to expand its fulfilment network, is now reaping the rewards of that decision. It has emerged from a period of cost inflation and operational challenge with a far leaner and more productive infrastructure. Its margins have increased and it has ample cashflow to make the necessary investments for an AI-led future.

Shopify, too, made a conscious shift by offloading capital-intensive logistics infrastructure while refocusing on its core mission of enabling merchants. Staff numbers have fallen despite considerable topline growth and this may well continue. In a recent internal memo, CEO Tobi Lütke stated that before requesting additional headcount or resources, teams must first demonstrate why AI cannot fulfil the required tasks.

In the digital infrastructure layer, Cloudflare has the potential to be a foundational enabler of AI services. In the past two years it has combined this potential with a sharp improvement in the profitability of its internet services business. This makes it more robust and gives it the flexibility to invest and take advantage of the opportunities ahead.

DoorDash has quietly become one of the most reliable scaled logistics networks in North America. It has grown beyond takeaway delivery into grocery, retail, and local logistics. As it has grown it has shown operational discipline and delivered fifteen percentage points of margin improvement in only two years, becoming decisively profitable in the process.

These examples highlight what we increasingly view as a shared trait across the most promising businesses in our portfolio: not simply speed or scale, but the capacity to absorb shocks, learn quickly, and reorient without losing momentum. In a world that is becoming more fragmented, more protectionist, and more unpredictable, this kind of organisational flexibility will matter more than ever.

Resilience is far from guaranteed. A few of our investments faced more serious challenges. Moderna, once our largest holding, underperformed meaningfully. Vaccine fatigue and lower uptake of COVID boosters weighed on near-term demand, but we believe its mRNA platform remains one of the most promising in modern medicine.

The company’s work on respiratory combinations and personalised cancer vaccines continues to advance. But better commercial execution is essential if the company is going to turn its technical excellence into real-world treatments with its existing financial resources.

Northvolt, once a substantial private holding, failed to deliver. Despite deep demand for battery manufacturing in Europe, the company struggled to scale production and was unable to justify further support. The investment has been written down and offers hard lessons about capital-intensive ventures and the importance of execution in manufacturing.

Beyond the US

While much of the AI revolution is being led by US companies, we continue to believe that innovation is geographically diffuse and that great companies are being built in every corner of the world. One of the privileges of the Scottish Mortgage mandate is the freedom to invest globally without benchmark constraint. This year, we made full use of it.

In Latin America, our largest public company investment, MercadoLibre delivered another set of strong results. In ecommerce, it has continued to take share as competitors retrench. Investments in logistics are paying off, with faster fulfilment times and improved customer experience reinforcing user loyalty.

Despite macroeconomic challenges in key markets like Argentina and Brazil, the company’s geographic breadth and operational flexibility have allowed it to navigate currency pressures and local inflation effectively.

MercadoPago has become a leading digital wallet and payments infrastructure across multiple markets, with rising adoption not only online but at physical point-of-sale. It has moved beyond simply facilitating transactions on MercadoLibre’s platform to becoming an embedded part of daily life in the region. The company typifies the earlier description of operational discipline leading to higher margins, cashflows and subsequent resilience.

Nubank, which we added to the portfolio, is now the largest independent digital bank in the world outside China. It has gained over 100 million users primarily through organic growth, which significantly reduces customer acquisition costs compared with those of competitors.

The company’s digital-first approach provides a substantial cost advantage by eliminating traditional bank branches, resulting in industry-leading profitability. Nu has also expanded beyond credit cards into highly profitable areas such as personal loans and secured lending, with significant potential still remaining untapped in Brazil, Mexico, and Colombia. It still retains ample opportunity for expansion, both geographically within Latin America and through further product diversification.

>We took a new position in Sea Limited which has a fast-growing ecosystem across e-commerce, digital financial services, and gaming in South East Asia. Shopee, its ecommerce arm, is gaining market share, supported by scale advantages and an expanding logistics network, helping drive operational efficiency and gross margin improvements.

SeaMoney is emerging as a major fintech player, riding the wave of digital lending in underbanked markets and delivering strong growth with healthy credit metrics. Its main competition in ecommerce are subsidiaries of our Chinese holdings PDD and Bytedance.

Ferrari, was among the strongest contributors to returns this decade. It represents a different flavour of growth for the portfolio. It is not built on technological disruption, but on brand power, scarcity, and executional excellence.

It exemplifies the idea that transformational value creation doesn’t always come from novelty, but sometimes from a deep, sustained focus on what doesn’t change. Its electrification strategy, and pricing power underscore the durability of its brand and the value of long-term stewardship.

We also added a small position in Hermès, as it possesses qualities similar to those that have made Ferrari one of the most quietly powerful contributors to the portfolio. While its products couldn’t be more different (handbags and scarves versus supercars), the business models share a set of rare characteristics such as extraordinary pricing power, deliberate scarcity and multi-decade growth with minimal capital intensity.

China: From Retrenchment to Renewal?

Over the past five years, investing in China has demanded a combination of conviction and patience. The regulatory wave that began with the blocking of the Ant Financial IPO signalled a new era where private enterprise would be expected to align more closely with national objectives. Many global investors exited. We did not. Our exposure declined, but we remained committed to the best businesses China had to offer.

This year brought tentative signs of a thaw. A highly symbolic handshake between President Xi and Alibaba founder Jack Ma suggested an evolving tone. Government rhetoric has turned to supporting private-sector job creation, and valuations, once priced for ruin, have started to recover.

Our Chinese holdings, though concentrated, are among the most operationally dynamic in the portfolio. Meituan successfully maintained its dominance in food delivery against competition from Douyin, improved efficiency by raising commission rates, and strategically cut lower quality, unprofitable business lines. It leveraged its strength in operational execution and merchant relationships, increasing advertising revenue and attracting more merchants back to its platform by promising sustainable returns.

PDD has taken its discount ecommerce model global through Temu. China still represents the vast majority of profits. To mitigate tariff risks and logistical challenges, PDD is transitioning toward local warehousing and fulfilment centres in overseas markets.

We added a new position in electric vehicle manufacturer BYD. The company has a strong position in the ruthlessly competitive Chinese electric vehicle market, driven primarily by vertical integration, significant scale advantages, and a dominant market share in lower priced segments. The company is expanding rapidly outside China and recently exceed $100bn in annual revenue. 

Despite potential challenges, such as slowing growth in China’s EV market, geopolitical uncertainties, and intense competition in higher-end segments, BYD’s substantial investments in battery technology, cost leadership, and strategic international expansion position it for robust long-term growth.

We remain alert to risks, including geopolitical frictions and potential tariffs. But we also recognise that China remains home to an enormous, educated, and entrepreneurial population and a huge share of global GDP. With roughly 14% of the portfolio now invested in Chinese companies, we are managing our overall exposure but responding when we find compelling long-term opportunities.

Looking to the Next Generation of Winners

The nature of long-term investing is to plant seeds today that may become giants tomorrow. We are always seeking companies that could shape the next decade and this year offered real progress from some of our most ambitious private holdings.

SpaceX has fundamentally altered the economics of space launch through rapid innovation and vertical integration. But the launch business, while impressive, is only part of the story.

SpaceX’s satellite internet division, Starlink, is rapidly becoming a significant telecoms player in its own right, with over five million subscribers and a growing footprint in underserved markets. Its unique access to launch capacity provides it with a moat that others are struggling to overcome. Even Amazon’s Project Kuiper despite enormous capital backing is years behind in deployment.

Then there is Starship, SpaceX’s next-generation rocket. Once operational, it will offer payload capacity and unit economics that dwarf anything currently available. Starship could enable entirely new industries such as large-scale in-orbit manufacturing, deep-space missions, or even space-based energy infrastructure. That capability may sound speculative, but SpaceX’s track record suggests otherwise.

What makes SpaceX so attractive to us is not just its current lead, but the culture that sustains it. This is a business defined by urgency, ambition, and engineering excellence. It continues to execute with speed and discipline, even at scale.

In a world of capital-light, software-dominated models, SpaceX reminds us that the physical world still offers enormous room for innovation and that the rewards for solving the hard problems can be extraordinary.

We are also seeing advances in next-generation transportation. Our holding in Aurora Innovation, a leader in autonomous trucking, is expected to begin commercial operations imminently. Aurora recognised that long-haul trucking and goods transport are among the most promising, near-term applications for autonomy.

The United States has faced a chronic shortage of truck drivers for years and the problem is expected to get significantly more acute over the next decade. Highways are more structured environments than urban roads which, combined with a compelling business case make this one of the more promising entrants in self-driving.

Joby Aviation entered the final phase of FAA certification for its electric vertical take-off and landing aircraft. The US Air Force took delivery of its second vehicle and Joby acquired a production facility in Dayton Ohio.

The concept of urban air mobility has often felt like science fiction, but with growing support from regulators and real-world test flights underway, commercial deployment is coming into view. If successful, Joby could redefine regional transport and alleviate pressure on congested infrastructure.

Zipline, the drone logistics company, is moving beyond its original use case of delivering medical supplies in Africa. Its technology has been adapted for broader commercial applications, including rapid local delivery in urban environments.

It launched this service in Dallas in April 2025 in partnership with Walmart. Residents within a two mile radius of the Walmart Supercenter in Mesquite can now receive deliveries of over 65,000 items in thirty minutes or less.

These investments represent the kind of calculated risk that defines Scottish Mortgage’s approach: backing bold ideas and exceptional teams, with the patience to let them prove themselves over time.

Enduring Approach

We are often asked how we forecast product developments for our holdings or inflection points in their growth. We don’t. Our focus is on two core questions: Is the opportunity the company addresses transformational and is it getting bigger or smaller? Is the likelihood of capturing that opportunity increasing or decreasing?

This lens helps us remain invested in companies like SpaceX, which once seemed speculative but now dominates commercial space launch. Or Tempus AI, where the promise of genomic data to personalise cancer treatment continues to evolve. Or Stripe which has grown from an obscure internet payment processor into a platform handing volumes equivalent to 1.3% of global GDP.

Periods of rapid change are often uncomfortable. But they are also rich with opportunity. The environment ahead is unlikely to be more stable than the one we leave behind. Technology, demographics, energy, and geopolitics all continue to shift.

And that is why our job remains what it has always been: to find the world’s most exceptional growth companies, support them for the long term, and allow them to do the heavy lifting on behalf of our shareholders.

Risk Factors

Unlisted investments such as private companies, in which the Trust has a significant investment, can increase risk. These assets may be more difficult to sell, so changes in their prices may be greater.

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.