Scottish Mortgage interim management report

We see our role as partners to these companies. Supporting them through the provision of both capital and patience and backing them to do incredible things. Their path will rarely be a straight-line. All great companies face periods of difficulty and market doubt, if not outright hostility. These periods can be difficult to endure but great returns cannot be achieved without such testing journeys.

This requires us to be resolutely long term through both good times and bad. The road ahead will have its fair share of bumps, some companies will not work out as hoped but we believe it is through supporting and holding onto just a small number of extraordinary companies that exceptional returns can be achieved.

Returns

This approach has driven our returns. Over ten years Scottish Mortgage’s net asset value per share with debt at fair value (NAV) has increased by 1,072% versus a 275% increase in the FTSE All-World index (both in total return terms). Over five years it has increased by 341% against 83%. Six months of data is always too short a period to infer much that is useful from stock prices. However, since the end of March our NAV rose by 16% compared to a 9% increase in the index.

Although our focus remains on long-term capital appreciation, we are aware that a small but consistent dividend is of value to many shareholders. Acknowledging the Company's recent performance, the Board is recommending an interim dividend of 1.52p, an increase of 5% over last year's payment of 1.45p.

Portfolio

Over short periods, such as the last six months, the market has naturally found various things to worry about. A long-term approach is helpful here. It enables us to focus not on the cacophony of the stock-markets but the more predictable drumbeat of deep underlying progress. It has been the long-term and exponential improvements in computing technologies, genomic sequencing and energy storage that continue to strike us as the most important determinates of long-term returns.

These long-term trends may be too slow to shape financial news headlines in a single period but they compound over time as they grow in impact. Moreover, the powerful trends in computing technologies appear to not just be continuing but broadening in utility and application beyond the narrow remits of consumer internet to industries larger and far more diverse.

This broadening is slowly being reflected in the changing shape of the portfolio. The Trust’s investment in healthcare and biology companies for example has grown from 11.6% a year ago to 21.4% today. We are finding and supporting a growing number of businesses that we believe are benefiting from the intersection of biology and information technology.

Our largest holding, Moderna has been the greatest contributor to this change, writing what is effectively code in the form of RNA to program human cells. Moderna has helped the world to start escaping the tragedies and confinement of the last 18 months. However, it is the breadth and scalability of its mRNA technology platform rather than its Covid vaccine that holds the greatest promise. Its pipeline of programs is both large and growing, targeting diseases such as flu, Zika, HIV, cancer and many more.

Recursion Pharmaceuticals and Tempus are successfully leveraging growing quantities of big data combined with machine learning to powerful effect in drug discovery and cancer treatment. We took a new holding in 10x Genomics whose products enable the analysis of single cells complementing Illumina’s next generation sequencing and enabling a more granular understanding of biology.

We continue to see opportunities for technology platforms to improve resource allocation in the economy across a growing range of areas such as freight, food and finance. At the same time the question of how to regulate big tech platforms continues to challenge law-makers across the globe. China has taken to this task with particular vigour. It has demonstrated far greater speed and forcefulness in approach than elsewhere. This sharp adjustment has naturally presented challenges both in market sentiment and for technology businesses that are having to adapt to a rapidly altering regulatory environment. At the same time there has been a push for the rewards of China’s growing prosperity to be more evenly distributed. Together these shifts have negatively impacted the share prices of many of our Chinese holdings.

The underlying progress of the companies however remains surprisingly strong. Alibaba and Tencent both continue to grow revenue in excess of 20% whilst Meituan and Pinduoduo are both growing considerably faster. The companies themselves are keenly aware of their need to contribute not just to shareholder returns but to society to ensure true sustainability. We will continue to assess the long-term implications of the new regulatory approach as they apply to each of our holdings.

Outlook

Our attention remains focused on maximising returns over the next ten years for Scottish Mortgage shareholders. We have no right to claim insight over the possible gyrations of stock markets over shorter time periods.

As we anticipate the next decade we are both optimistic and enthused. It strikes us that there are multiple drivers of change and thus opportunity. These include the continuing digitisation of our economy, the intersection of information technology and biology and the much-needed energy transition. Together they provide an opportunity set that is profound and diverse. We look forward to continuing to back the companies and visionaries that drive and take advantage of these powerful long-term trends.