Scottish Mortgage ‘looks harder’ at resilience after Northvolt bankruptcy

Resilience is becoming a crucial quality as market shocks become more frequent – a lesson Tom Slater learnt from his holding in Northvolt last year.

Scottish Mortgage (SMT ) is leaning into resilience as President Trump’s unpredictable long-term objectives throw global markets further into uncertain territory.

Writing in the £12.8bn trust’s biannual magazine, Baillie Gifford manager Tom Slater described this quality as providing ‘the ability to make your own weather in challenging times’.

Heading off concerns that this means SMT is becoming ‘more timid and risk-averse,’ he added: ‘We’re still searching for great businesses whose future is uncertain but which can be wildly more successful than anybody else believes.

‘But the companies that hurt performance in recent years were often those whose vulnerability to changing circumstances ended their chance of fulfilling their potential. When the next crisis comes around, we want to be sure we don’t have too many such companies in our portfolio. It’s about increasing the odds of success by choosing which pools you fish in.’

Lessons have been learnt from the difficult period SMT endured in the rising interest rate environment of 2022, following an unusually long expansion, which saw its share price nearly half. 

‘Our willingness to back a company’s blue-sky vision is unchanged. But we’re more aware that it’s the business you’re running today, not the one you might have tomorrow, that must deal with problems along the way,’ Slater said.  

‘However great the opportunity, if a company can’t overcome inevitable bumps in the road, it won’t live to fulfil its potential. It’s about maximising chances.’

The manager added that better attention to resilience may well have mitigated losses endured from its holding in Northvolt, the Swedish battery maker that filed for bankruptcy in November last year.

‘We shared founder Peter Carlsson’s vision of a European champion in a world increasingly turning to electric vehicles. Our mistake was not foreseeing its vulnerability to weaker-than-forecast customer demand and operational problems that delayed its ramping up of capacity.’

In practice, the new emphasis means asking the obvious questions of companies – does it have debt or not? Does it have big enough margins to absorb the ebb and flow of sales? Does it generate cash?

But Slater says there are also wider cultural questions to ask of management, in SMT’s case, often related to holdings being founder-led businesses. 

‘Are they nimble and adaptable? Do they rely on things continuing to be the way they’ve always been? Do they innovate? Are they competing in an industry or creating an industry?’

Meta, parent of Facebook and Instagram, and 4.3% of SMT’s portfolio, is one company that has been striving to be more resilient this year – addressing some of the weaker parts of its business and cost base in what Slater called a ‘year of efficiency’. 

‘That puts it in a much better position to benefit from an improved operating environment,’ he said. 

According to data from Deutsche Numis, shares in SMT are up 20.2% year-to-date, beating the 10% from the MSCI World. Longer term performance figures are also strong, shares up 368.9% over ten years ahead of the benchmark. 

As of yesterday, they trade on a 10.5% discount to NAV.