Scottish Mortgage outperforms for first time in four years

Scottish Mortgage Ord (LSE:SMT) produced a strong net asset value (NAV) return of 11.2% versus the FTSE All World’s return of 5.5% in its latest financial year to 31 March 2025. This breaks the streak of three consecutive periods of underperformance since 2022.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

The share price total return was less, at 6%, on account of a widening discount from -4.5% to -9.1%. Notable contributors in the year included the unlisted SpaceX as well as Tesla Inc (NASDAQ:TSLA), NVIDIA Corp (NASDAQ:NVDA) and Spotify Technology SA (NYSE:SPOT). Areas of weakness included Moderna Inc (NASDAQ:MRNA), ASML Holding NV (EURONEXT:ASML) and unlisted battery producer, Northvolt.

The numbers in detail (for financial year to 31 March 2025)

Net Asset Value (NAV) Return: +11.2%
Share Price Total Return: +6%
Benchmark Return: +5.5%
Premium/Discount: -9.1% (vs -4.5% in prior year)
Full-Year Dividend (proposed): 4.38p (+ 3.3% vs prior year)
Net Gearing: 13% (vs 11% in prior year)

Outlook

Lead manager Tom Slater and deputy manager Lawrence Burns highlight tenets of resilience and adaptability in portfolio companies as evermore vital against a backdrop of global tariffs and immense market volatility that began in the weeks since reporting period-end. Anticipating a continuation of global fragmentation and instability, Slater touts a common trait across portfolio companies: “the capacity to absorb shocks, learn quickly, and reorient without losing momentum”, noting that such periods of upheaval and change also provide long-term investment opportunity.

Discount

Throughout the year, the discount of the trust increased from -4.5% at the end of March 2024 to -9.1%, met with an historic number of share buybacks undertaken by the board in a bid to keep a lid on the discount.

Portfolio

Given the global investment trust’s divergence from benchmark, unlisted investments (now 26% of the portfolio) and focus on innovation, SMT’s portfolio is more easily expressed in terms of themes. Conviction in generative AI is reiterated, although notably the holding in Nvidia, has been significantly reduced (now just over 2%) from being the largest position at 8% last April. Its reduction reflects lesser upside perceived going forwards. Instead, the team added to companies benefiting from adoption of AI tools, including Meta Platforms Inc Class A (NASDAQ:META), Spotify and Shopify Inc Registered Shs -A- Subord Vtg (NASDAQ:SHOP), and initiating a new holding in Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) – a leader in the semiconductor market.

•  Where next for tech shares following the tariff turmoil?
• The pros give their take on whether AI stocks are back in the game

On the theme of next generation transport, holdings include Aurora Innovation Inc Class A (NASDAQ:AUR) – developing autonomous long-haul trucking, as well as Joby Aviation Inc (NYSE:JOBY) – leading in urban air mobility. SpaceX, now the trust’s largest holding, is cited as reshaping the economics of space, as well as being a leader in the telecoms space via Starlink.

Digitalisation of finance is a theme bolstered with the addition of Nu Holdings Ltd Ordinary Shares Class A (NYSE:NU), commonly known as Nubank – a Latin America challenger bank that has gained over 100 million users, as well as the Asian fintech, Sea Ltd ADR (NYSE:SE). In the realm of luxury goods, alongside a longstanding holding in Ferrari NV (MTA:RACE), the managers have introduced a holding in the French handbag and clothing producer Hermes International SA (EURONEXT:RMS).

Lastly, noting some thawing of public-private sector tensions, Slater and Burns have added across China – a hotbed of innovation - initiating a new holding in EV producer BYD Co Ltd Class H (SEHK:1211). China now comprises 14% of the portfolio, including exciting businesses such as Temu owner PDD Holdings Inc ADR (NASDAQ:PDD), and food delivery business Meituan Class B (SEHK:3690).

Dividend

While SMT does not look to produce large amounts of income, it’s notable that the trust has grown its dividend for 42 consecutive years, and intends to continue this with a proposed full-year dividend increase of 3.3% to 4.38p per share. This increased distribution comes in spite of a fall in earnings, largely due to a write-off of income from the ailing Northvolt.

Gearing

Following a decrease in the prior year, there was a small increase in gearing from 11% to 13%, financed at a relatively favourable rate.

ii View

Following a period of underperformance versus its benchmark since 2022, that is reflected in weaker three- and five-year relative returns, the past year has marked a pleasing return to form for the differentiated SMT.

Investors may be disappointed in the short term by a reopening of the discount throughout the year (and persisting post period-end), in turn dampening the share price return. Nonetheless, the board have shown themselves willing to take action via historic amounts of buybacks throughout the year, amounting to close to £2 billion (or 15% of shares in issuance) – well beyond the initial £1 billion commitment – and the discount is markedly improved from the depths seen in 2023, which in May that year peaked at -22.7% This willingness to rectify the discount via share purchasing is balanced with the need to deploy capital into long-term investments. A pleasing development is the reduction in ongoing charge from an already cheap 0.34% down to 0.31%, representing a compelling fee for any active equity trust or fund, even more so for one with such high active share and exposure to unlisted assets.

Contribution to performance was varied, including strong performance from both familiar and more esoteric listed and unlisted names. Despite some standout performance, the average valuation change of the unlisted companies was negative. SpaceX (the trust’s largest position) continued to deliver in operational and commercial terms and has been rewarded with yet higher private valuation, now around $350 billion (£261 billion). Meanwhile, ByteDance (valued at £300 billion) revealed an impressive four billion monthly average users and doubling of TikTok sales, although it must wrangle with a potential sale in the US.

• 12 investment trusts face continuation votes
• Is US stock market exceptionalism over?

Less encouragingly, the bankruptcy and subsequent writedown of battery producer Northvolt in Europe (formerly a high-conviction position for SMT) is a disappointment and misstep that has hampered earnings per share and NAV performance for SMT in the year, reminding investors of the risk that can lie within private assets.

In all, even given this year of outperformance, there is no hiding the disappointing return of SMT compared to a global equity index over three and five years, largely due to the trust’s weakness in 2022, with rising interest rates proving a big headwind. However, as a leveraged and adventurous portfolio of listed and unlisted equities in search of investment ideas that represent leaders and innovators of next-generation themes that take time to play out, scrutinising SMT’s performance over too short a window is unproductive. The trust’s longer-term track record remains robust, achieving close to annualised 5% outperformance over 10 and 15 years on a NAV basis.

The macroeconomic climate is shifting at an unprecedented rate, with major developments in global trade policy taking place even since the reporting period end in Q1 2025. While uncertainty may well plague global equity markets for some time to come, SMT’s approach is patient and steadfast, looking beyond macroeconomic noise that may rattle markets in the short term. Those investing in SMT ought to share a similarly adventurous resolve and long-term horizon with the managers in order to capitalise on transformational themes in the long run.