Can Scottish Mortgage get back on track? We speak to manager Lawrence Burns

This week, Microsoft and other tech giants announced huge profits, powered by the industrial revolution in generative artificial intelligence (AI).

But Scottish Mortgage, the £9.18bn FTSE 100-member investment trust that supports innovation in AI and every other form, is not buzzing with excitement.

The trust’s shares, which have fallen 35 percent since 2020, are at an embarrassingly large 19 percent discount to net asset value (NAV), even though the trust has stakes in two AI powerhouses: equipment maker ASML and semiconductor maker Nvidia .

This week I had the rare opportunity to look one of Scotland’s mortgage managers in the eye and question him about what is being done to improve the prospects for disappointed investors.

Lawrence Burns, deputy director, acknowledges the pain felt by shareholders of the trust, previously the most prominent name in the Baillie Gifford stable but now lagging behind the benchmark index: the FTSE All World. He also acknowledges that more volatility may be ahead.

But he argues that AI will have an impact on the economy and society as great as the invention of Gutenberg’s printing press in the early 15th century. Investing in such progress is Scottish Mortgage’s mission.

But as Burns puts it, “sometimes progress doesn’t happen in a straight line.”

This may be true. But should shareholders shrug their shoulders and adopt a five-year view, confident that ASML and Nvidia will continue to dazzle, and that lesser-known stocks, such as Korean e-commerce company Coupang, can also excel?

According to Burns, Coupang’s systems make those of Amazon, which Scottish Mortgage also owns, seem almost archaic.

Or should shareholders conclude that Scottish Mortgage’s structure – around 30 per cent invested in private companies – will pose a lasting obstacle to the revival of the economy? Scottish Mortgage share price?

These 52 unlisted holdings are a source of increasing concern, especially because, as Bestinvest’s Jason Hollands notes, their number now exceeds that of the 47 listed holdings.

The list includes ByteDance, owner of TikTok, the video app that has 1 billion users worldwide; Space X, Elon Musk’s rocket company; Stripe, the payments company; Ant Group, part of Chinese giant Alibaba and battery developer Northvolt.

Earlier this year, a former member of the trust’s board, academic Amar Bhide, questioned whether Scottish Mortgage had ‘the capabilities and managerial power to monitor these illiquid investments’.

The managers disputed this claim and Burns believes that ‘these interests are not our Achilles heel, but our strength’.

These are very large companies, not start-ups, that are revalued much more often than before.

Under normal circumstances, some of these companies would want to go public through an IPO (initial public offering). But Burns says they’re being deterred by the chilly IPO environment.

However, this poses another problem for Scottish Mortgage, as Hollands highlights: ‘The trust would struggle to provide additional funding to any of these companies as this would exceed the 30 per cent limit approved by shareholders. If Scottish Mortgage cannot participate, it risks being diluted.”

Burns notes, “This is not a permanent situation. At some point the IPO market will come alive.”

He is also hoping for a reassessment of the potential of some of the listed stocks, such as Delivery Hero, whose shares have fallen 47 percent this year. The Berlin-based food delivery company is making “real progress in the shift to profitability.”

In recent years, Scottish Mortgage has been associated with every type of transport, with bets on flying taxis and Ferrari. Tesla, Elon Musk’s electric car group, is an important holding company.

When asked whether this is wise given Musk’s acquisition of Twitter/X, Burns says Tesla and SpaceX have good managers.

The hours Musk now spends on Twitter/X could be about the same as he used to spend posting on the platform.

Burns says the trust’s association with the automobile dates back to its beginnings in 1909, as a vehicle to finance Malaysian rubber plantations whose product went on to make the tires for the Model-T Ford.

This is a new interpretation. Burns believes the trust’s name has history and brand recognition. But I believe it sounds solid, rather than snappy, which some investors may not have fully understood.

Those who bought the trust one, three or five years ago have experienced what Fidelity International’s Ed Monk calls “a rollercoaster ride.”

Like other analysts, Monk doesn’t think the discount will diminish anytime soon. However, he adds: ‘Things can change, of course, and now seems to be the moment of maximum pessimism – often a good time to buy.’

As someone who has been putting money into Scottish Mortgage for about a decade, I have rarely felt so pessimistic, despite the profits I have made. Like other investors, I want to see rapid progress on reducing the discount.