Scottish Mortgage: Our smallest unquoted stocks could be the next Nvidia

Deputy fund manager Lawrence Burns says Scottish Mortgage’s 22 early-stage investments have huge potential, pointing to top holding Nvidia as a previous success story.

Scottish Mortgage (SMT ) is best known for its large positions in some of the world’s biggest technology companies, such as Amazon and Tesla, but deputy fund manager Lawrence Burns believes the smallest positions in the £13bn global portfolio are just as vital to its future returns.

At the bottom of a long tail of 98 holdings in the Baillie Gifford flagship fund are 22 small unquoted companies that account for just 4.6% of assets but represent £552m of investments. Burns and lead manager Tom Slater hope they yield the successor to wonder stock Nvidia, the strategy’s top holding at 8%.

Burns revealed that Slater and James Anderson, the trust’s former lead manager who retired in 2021, first invested in US chip maker Nvidia in July 2016 when its shares stood at about $14.28 (£11.22).

The Californian company founded by Taiwanese-American businessman Jensen Huang listed on the Nasdaq in 1999 at $12 a share. Today the shares trade at about $1,210, having soared an astonishing 3,277% in the past five years after the now $3tn colossus established a stranglehold on the AI market with its highly advanced graphic processing units.

Burns said Slater and Anderson did not predict the scale of Nvidia’s success when they first bought the shares.

‘Nobody knew its potential, about transformers, large language models or ChatGPT. What we knew was an interesting, ambitious founder, an interesting culture and a decent, competitive moat,’ Burns said, adding that Scottish Mortgage’s holding has risen 80 times since its initial purchase.

The secret weapon

Speaking at Baillie Gifford’s headquarters in Edinburgh, Burns said the unquoted early-stage companies not only offer the potential for huge upside but give him and Slater the chance to learn about new markets.  

He pointed to US company Upside Foods, which grows meat from animal cells and counts Bill Gates among its investors. The company has grown to a $1bn valuation since launch in 2015 and has received approval from the US Food and Drug Administration. However, it faces the challenges of scaling up production and keeping costs down.

Another holding that excites Burns is Zurich-based Climeworks, which removes carbon dioxide from the air using direct air capture technology. While removing a tonne of carbon dioxide from the atmosphere currently costs $800-$900, the company believes a realistic long-term estimate is $200-$300. Climeworks is also valued at just over $1bn and is backed by Swiss private equity firm Partners Group and UK fund manager M&G through its PruFund-backed Catalyst venture capital fund.

Burns is also fascinated by what $3bn US quantum computing company PsiQuantum can reveal about the broader technology landscape as it develops computers capable of solving a larger range of problems faster than conventional machines.

‘When we take some of these types of holdings, we take into account a few different things,’ said Burns (pictured below and whom Baillie Gifford colleagues think resembles a young Anderson).

‘First is that we want that asymmetry so that if this works, this is potentially a very, very large company, because their early-stage investing has a lot more risk and so we want the payoffs to make sense.

‘The second thing we tend to want is an ability to learn about new markets that might become very large in the long run. And we’ve done that time and time again over the history of SMT – being willing to take small stakes in early-stage companies that could be the next big thing to help us learn.’

While Upside Foods, Climeworks and PsiQuantum are very small holdings with respective weightings of just 0.1%, 0.2% and 0.1%, Burns emphasised they are an important part of Scottish Mortgage’s £3.6bn sub-portfolio in unquoted stocks.

This accounts for 27.1% of assets, close to a ceiling of 30%, and comprises 53 businesses, led by Elon Musk’s rocket company SpaceX, which has garnered a $214bn valuation after a series of successful launches in the past year. It is the sixth-largest overall holding at 4.2% of Scottish Mortgage.

The fund also has a 2.7% weighting to Northvolt, the Swedish battery maker valued at $10bn whose plans to float have reportedly been delayed until next year.

The smallest private companies

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 Company Business SMT stake value (£m) Valuation ($bn)
Rappi Delivery platform  57.6  5.25
Thumbtack Online directory for businesses  57.6  3.2
Nuro Autonomous vehicle deliveries  42.1  8.6
JRSK (Away) Luggage manufacturer  39.8  1.45
Climeworks Carbon capture technology  39.7  1.08
Carbon Inc 3D printers  38.7  2.4
Honor Technology Home-care services  33.5  1.25
Teya Services Payment solutions  32  9
Workrise Technologies Connecting contractors  29.8  2.9
Lumeris Group Healthcare  28.9  1.3
KSQ Therapeutics Biotech  27.4  0.3
Heartflow Heart disease software  26.3  1.5
GoPuff Retail delivery  24.4  15
Capsule Prescription delivery  23.5  1
Zocdoc Medical directory  22.7  1.8
PsiQuantum Quantum computing  19.7  3.15
Upside Foods Cultivated meat producer  15.5  1
Bolt Threads Natural fibres and fabrics  11.7  1.2
Blockstream Financial software  4.6  3.2
Indigo Agrictulture Crop analysis  3.7  0.2
Uptake Technologies Enterprise software  2.2  2.3
Udacity Online education  1.3  0.1

Source: Annual report; TechCrunch; Tracxn; Dealroom

A return to form

Burns painted an optimistic picture as a revival in the initial public offering market could see the fund crystallise gains and scotch any remaining scepticism about the valuations of its private companies.

Scottish Mortgage shares tumbled to an 18% discount below their asset value a year ago after halving in the growth stock crash of 2022 as interest rates spiked and concerns over its large exposure to unquoteds grew.

Since then, the shares have bounced back 30% with the discount narrowing to 8%, helped by the emergence in March of activist hedge fund Elliott Management with a 5% stake, although that subsequently halved after Scottish Mortgage ramped up purchases of its own shares.

Over the past three years, shareholders have seen their returns fall 26%, while the FTSE All World index benchmark gained 31%, according to Morningstar data. Over a decade, shareholder returns have soared 376% while the index has trailed with 211%. 

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