Sailing into space
Ian Cowie explores the investment trusts with exposure to space tech.
If Christopher Columbus had offered you an equity stake in his sailing ship, Santa Maria, for what became its maiden voyage to the new world in 1492, would you have invested? This hypothetical question is worth considering now that space technology is turning science fiction into commercial fact, with multi-billion dollar revenues to match.
For example, the billionaire Elon Musk’s self-descriptive business, SpaceX, completed its 300th successful rocket launch in January this year, lifting its total number of Starlink satellites to more than 5,000. That means this internet service provider (ISP) can reach everywhere on earth, including former ‘black spots’, and recently began to extend its scope to include mobile phones.
SpaceX and Starlink are not quoted on any stock market, but total revenues nearly doubled to $4.6 billion in 2022, according to The Wall Street Journal. Last year the SpaceX president and chief operating officer Gwynne Shotwell claimed her rocket company had turned a profit for the first time and Musk said Starlink achieved cashflow breakeven in a tender offer that valued the combined businesses at $150 billion.
No wonder some analysts are comparing the current situation with historical wealth creation opportunities, when explorers first sailed over the horizon to discover America. Deloitte, one of the biggest business consultants on this planet, recently claimed that SpaceTech could be at a similar inflection point to the Age of Exploration during the 16th and 17th centuries. The consultants said: “Space has always captured our curiosity and it’s becoming more relevant to our everyday lives, driving innovation and increasing productivity across almost every sector.”
“Deloitte, one of the biggest business consultants on this planet, recently claimed that SpaceTech could be at a similar inflection point to the Age of Exploration during the 16th and 17th centuries.”
Coming down from the clouds, the stockbroker Killik cautioned: “Many space-related investments are very early stage and likely to require multiple funding rounds before they get close to maturity. Given this, the investment trust structure is ideal as it allows for a patient approach and reduces the pressure on managers to sell too early.”
Several investment trusts offer individual shareholders, who are willing and able to accept substantial risks, an opportunity to gain some exposure to potentially extraordinary returns. For example, Seraphim Space Investment Trust (SSIT) was launched in July, 2021, to seek: “capital growth over the long term through a diversified, international portfolio of predominantly early and growth stage unquoted SpaceTech businesses with the potential to dominate globally.”
Nor is it too late to get onboard. SSIT’s share price has halved since interest rates began to rise and Mr Market lost his taste for ‘jam tomorrow’ stories. That brought this stock back down to earth with a bump, before a partial bounce-back last month lifted them to trade at a 49% discount to its net asset value (NAV).
Winterflood investment trust analysts commented: “SSIT was hit harder than most by the market’s pivot away from growth and venture, but with a discount of 55% (in January), we roughly estimate this to suggest all positions except its top two holdings and cash reserves are worthless. That seems rather unlikely to us, not least due to the structural tailwinds offered by increased spending on defence and climate monitoring expected in 2024.”
SSIT does not hold any SpaceX shares. By contrast, several other investment trusts managed by Baillie Gifford do enable small shareholders to invest alongside the billionaire Musk and other big institutional investors, such as Fidelity and Google.
These investment companies include Baillie Gifford US Growth (USA), where 6.3% of assets are invested in SpaceX; Edinburgh Worldwide (EWI) where it accounts for 9.6% of the fund; Monks (MNKS), where the allocation is only 0.2%; Schiehallion (MNTN), 6.5% of the total; and Scottish Mortgage (SMT), where SpaceX represents 3.6% of all assets.
All those percentages show how SpaceX is only a small part of each investment trust’s portfolio, which diminishes the risks entailed in space exploration by diversification. On a brighter note, it can also be argued that these holdings offer “asymmetric returns”, because the most that can be lost is restricted to 100% of each modest allocation but the potential rewards are infinite.
Put another way, these portfolios enable investors to hope for the best while preparing for the worst – rather like those early adventurers, setting sail across the Atlantic.
Ian Cowie is a shareholder in Edinburgh Worldwide (EWI) as part of a globally diversified portfolio of investment trusts and other shares.