After the roaring success of investment trust Scottish Mortgage (SMT) in 2020, fueled by the rocketing share prices of firms such as Tesla and Amazon, investors are wondering two things: has the good money already been made in the trust, and where are the next generation of winners going to come from?

Certainly this year is unlikely to be as good as last for Scottish Mortgage given the market rotation away from growth stocks with investors able to pick up earnings growth much more cheaply elsewhere at the moment.

But clearly the Baillie Gifford-run trust backs its holdings over the  coming five years (the minimum period in which it says it should be judged), and has a number of holdings it believes will be the next generation of winning stocks.

WHERE MOORE’S LAW FITS IN

Scottish Mortgage looks for stocks that will be involved in technological change and says that central to this will be Moore’s Law. Moore’s Law refers to the prediction of Intel co-founder Gordon E Moore in the 1960s that the capacity of microchips would double every two years.

Baillie Gifford investment specialist Claire Shaw says: ‘What this means in practice is come the 2030s, computing power should be 60 times more powerful than today, and this has huge implications for industries that are ripe for disruption.’

On the backdrop of Moore’s Law, manager Tom Slater picks out healthcare as a sector with huge and rapidly expanding opportunities.

He explains: ‘We’ve traditionally seen progress move at the pace of the lab bench or the capabilities of individual humans. But as we see technology applied to a greater breadth of healthcare applications, what you do is kick that pace of progress onto the trajectory of Moore’s Law.’

MORE TO MODERNA THAN COVID VACCINES

One of the top holdings in the trust is US biotech firm Moderna, which successfully developed a Covid-19 vaccine last year using mRNA technology, and almost became a 10-bagger in 2020 as its shares soared.

But Slater says Moderna should be seen as a lot more than just a play on Covid vaccines, pointing to its mRNA platform more generally which he thinks has ‘a lot of potential’, with a Ballie Gifford colleague likening the view of Moderna as just a Covid vaccine-maker to Amazon being seen as a bookshop.

Slater dismisses the idea Moderna will be less relevant once Covid vaccines are rolled out and explains, ‘The potential to address all sorts of other areas with this technology is hugely increased. In the case of Moderna itself, the company has always had very large ambitions.

‘What Covid has allowed it to do is go from a company with interesting science and interesting technology, but in the experimental phase, to a company which is generating substantial revenues, has a significant cash position and therefore can invest heavily to commercialise this technology in lots of other areas.’

Where Moderna’s technology can be developed the most, Slater adds, is in vaccines for other diseases, and he says its ambition is to develop a number of drugs at a time and create a whole new category of medicines, with the revenues from Covid vaccines giving it the resources to ‘go and pursue a really big opportunity’.

POTENTIAL IN PAYMENTS PROCESSING

The other big area Slater points to, and one which has a lot of investors excited about the growth potential, is payments processing with two currently private companies in the portfolio – Stripe and TransferWise – and one listed firm, Adyen, falling in this category.

Global payments processor Stripe reached a valuation of $96 billion in a funding round in March, in which Scottish Mortgage was a backer.

The company helps businesses – including the likes of Amazon, Uber and Spotify – process online payments and navigate different regulations and systems across the globe, and what has investors excited about the stock is the untapped opportunity in many different parts of the world, with the firm looking to launch in Brazil, India and Indonesia this year.

Stripe is well-established in the UK and it’s estimated that three out of four UK adults made a payment via Stripe over the last year. Its business has boomed during the pandemic as online shopping exploded.

Slater explains why the company’s proposition is so highly valued by its customers: ‘Something like Stripe becomes really valuable because not only does it allow you to do point of sale but it allows you to take payments across all these other channels.

‘That can dramatically expand the reach of your business because trying to take payments in different jurisdictions or different geographies is a vastly complex process which you can now completely outsource [to Stripe].’

Complementing Stripe in the portfolio is Dutch-listed Adyen, which is longer established having been founded in 2006 and is highly profitable. It has a market cap of €63 billion.

While Stripe is focused on online companies and smaller retailers, Adyen has a greater bias towards the retailing giants.

Slater says that for larger businesses, payment processing across the world can get ‘exponentially more complicated’ and adds that that’s where a company like Adyen comes in, ‘because they can help the biggest retailers, companies like McDonalds for example’.

Slater explains: ‘If McDonalds wants to take payments in lots of different countries, if it wants to take payments online, it needs pretty powerful tools that have a level of complexity you don’t see in smaller retailers.

‘We think Adyen is doing a really great job of providing that much more complex set of tools and a deeper level of integration with those enterprise customers.

‘So there’s this huge new opportunity that’s arisen because of all these different channels and we think these payment platforms and associated companies as a result have just this vast opportunity in front of them.’

OTHER HOLDINGS

Other holdings in the portfolio which have captured investors’ imagination include Elon Musk’s unquoted aerospace firm SpaceX.

Slater notes SpaceX is ‘driving down cost of access to space’ and ‘not just incrementally but by orders of magnitude’ and points out that as the cost in terms of dollars per kilogram of cargo into space gets lower and lower, it opens up ‘huge new applications’.

Slater adds: ‘One of the first is telecommunications, so moving away from having mobile phone masts to having communications access to doing that from satellites. We think there’s all sorts of applications that this enables.’

Another stock well-known to UK investors which Slater highlights is Ocado (OCDO), and says the fact the market for online grocery deliveries is well developed in the UK compared to other countries can help set the company apart globally, particularly as it has found a model that ‘allows costs to remain very low.’

He says: ‘What Ocado can point to is a functioning model in the UK that actually has better margins than the big UK grocery chains through an online model, and that’s a really powerful example to be able to take to other supermarkets in other countries and make it really desirable for them to want to take on this technology offer.’

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