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 are 22 small unquoted companies which, while they account for just 4.6% of assets, represent £552m of investments that Burns and lead fund manager Tom Slater hope could uncover the next wonder stock such as an Nvidia, its top holding at 8%.

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

The Californian company founded by Taiwanese-American businessman Jensen Huang, which first listed on the Nasdaq in 1999, now trades at $1,210, having soared an astonishing 3,227% as the now $3tn colossus has established a stranglehold on the market in artificial intelligence with its highly advanced graphic processing units.  

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

The secret weapon

Speaking at Baillie Gifford’s headquarters in Edinburgh, Burns said the unquoted early-stage companies not only offered the potential for huge upside but gave 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 as it has grown to a $1bn valuation since launch in 2015.  The company has received approval from the US Food and Drug Administration (FDA), but faces the challenges of scaling up production and keeping costs down.

Another holding exciting Burns is Zurich-based Climeworks, which removes carbon dioxide from the air using direct air capture technology. While it currently costs $800-$900 to remove a ton of carbon dioxide from the atmosphere, the company believes a realistic long-term estimate is $200-$300 per ton. 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 PsiQuantum can reveal about the broader technology landscape as the $3bn US company develops quantum computers capable of solving a larger range of problems faster than conventional machines.

‘When we take some of these types of holdings, what we take into account is a few different things. One is we want that asymmetry so that if this works, this is potentially a very, very large company, because there early-stage investing has a lot more risk and so we want the payoffs to make sense,’ Burns (pictured) said.

‘The second thing we tend to want is also 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 these three are very small holdings with respective weightings of 0.1%, 0.2% and 0.1%, Burns emphasised they’re 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 of 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.

It 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.

A return to form

Burns – who Baillie Gifford colleagues think bears a resemblance to a young Anderson – painted an optimistic picture as a revival in the initial public offering market could see them crystallise gains and scotch any remaining scepticism towards 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 as 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 last three years, shareholders have seen their returns fall 26%, while the FTSE All World index benchmark gained 31%, Morningstar data shows. Over a decade, shareholder returns have soared 376% while the index trailed with 211%.