The managers of Scottish Mortgage Trust (SMT) Tom Slater and Lawrence Burns are in full blown apology mode after a recent boardroom spat which saw its chair of 14 years Fiona McBain step down (21 March) with senior independent director Justin Dowley taking over.

‘We are very sorry to the shareholders; it’s not helpful to anybody seeing the trust in the headlines. My experience of the board of Scottish Mortgage is one of independence, strong governance, and appropriate challenge to the managers over the years. I will go one step further and say they’ve helped us to get better’, said Slater at a hastily arranged webinar on 29 March.

WHAT HAPPENED?

A dispute arose between non-executive director Amar Bhide and chair McBain after he questioned Scottish Mortgage’s exposure to unquoted companies and other issues around the appointment of new board members.

As of 28 February 2023, 29% of the portfolio was in 52 private investments, up from 19% in September 2021 and 25% in March 2022. The cap for private investments is 30%.

After Bhide raised his objections he told the Financial Times that Scottish Mortgage asked him to resign on 17 March. Bhide has now left the board and is no longer a director.

REJECTING THE WOODFORD COMPARISONS

Throughout the webinar both Slater and Burns were insistent that Scottish Mortgage Trust was ‘not another Woodford’. As a reminder one-time star fund manager Neil Woodford saw his reputation shattered as his flagship equity income fund was wound up after a flood of redemptions. Woodford had invested in lots of unquoted assets which were then difficult to sell when he needed to hand investors back their cash.

Slater says: ‘Our trust focuses on big established companies worth £10 billion, the average company in the Woodford fund was approximately valued at £200 million.

‘The second [big] difference is our structure and Woodford’s fund. We are a closed-ended vehicle, Woodfords’s was open-ended.’ This difference in structure is important because, as a listed entity, Scottish Mortgage does not have to worry about the impact of redemptions.

HAVE LESSONS BEEN LEARNED ON PRIVATE COMPANIES?

Burns observed that 18% of the private companies in the portfolio are cash generative compared to 13% of the listed companies in the trust’s portfolio and said in 2022 Scottish Mortgage invested a further £260 million into private companies and will continue to do so. Slater says that it was shareholders in the first place who were keen on increasing the limit on the number of private companies which could be held from 25% in 2020 to what it is now 30%.

‘We have [Burns and myself] little to do with the valuations of private companies. In fact, S&P Global does a valuation assessment. Then it goes to a team of accountants at Baillie Gifford, then through external audits for quarterly revaluations,’ says Slater.

‘What is more, private companies like Musk’s SpaceX have the potential to generate substantial cashflow for shareholders in the future if parts of that business IPO, for example Starlink – a satellite internet constellation operated by SpaceX,’ says Burns.

LOOKING TO THE LONG TERM

Slater and Burns remain upbeat as they sought to reassure shareholders of the benefits of investing in the trust for the ‘long term’.

The pair focused on the holdings of the trust throughout the webinar as well as side-stepping several questions from irate shareholders (fielded online by a moderator) about the recent performance
of the trust.

Over the past 12 months, its shares have fallen nearly 40% to 656p – a far cry from their peak of above £15 in November 2021. And having frequently traded at a premium to NAV (net asset value) they are now at a near-20% discount, which reflects scepticism about the true valuation of the trust’s unquoted holdings.

Both Slater and Burns admit the trust’s performance has been less than impressive over the past 18 months, but emphasised that it has ‘delivered’ over the past decade.

On a 10-year view the trust has achieved a share price total return of 323% compared with 209.3% for the Global AIC Sector. Burns says: ‘We hope the trust will recover and we as managers can help with that journey.’

PUTTING FAITH IN FOUNDER-RELATED BUSINESSES

Burns says what will ‘save’ the trust is investing in exceptional companies in the long-term and ‘identifying these opportunities’ as they have done investing early in the likes of gaming platform Roblox (RBLX:NYSE), Elon Musk’s privately-held space technology firm SpaceX, biotechnology firm Moderna (MRNA:NASDAQ) and Tesla (TSLA:NASDAQ).

Slater says: ‘We tend to ignore macroeconomic issues, like rising interest rates which have come to an end now [we think]. We are stock pickers focusing on company fundamentals, and we are not trying to time the markets.

‘The trust has faith in firm founder managers like Elon Musk and Tesla. Despite the pandemic, Tesla had fantastic execution and expansion which assisted profitability. These types of companies
can deliver long-term value to our shareholders,’ adds Slater.

Burns also picks out Moderna which is a ‘transformational healthcare’ business where ‘technology meets healthcare.’

‘The Moderna vaccine during the pandemic saved one million lives, and the firm is using their platform to development other vaccines for flu, respiratory syncytial virus (RSV) and a personalised cancer vaccine.’

Despite these company ‘success stories’ Slater and Burns admit they have made mistakes over investments in China like ByteDance, owner of social media sensation TikTok.

Although their investment in ByteDance is generating positive cash flows, there is geopolitical risk investing in China, as well as a tough regulatory environment, which the managers concede can ‘limit the upside’.

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