Why Scottish Mortgage slashed its Tesla stake

Scottish Mortgage managers Tom Slater and Lawrence Burns have significantly reduced their holding in Elon Musk’s Tesla, with the electric vehicle maker now accounting for less than 1% of the £13.6bn trust.

Slater (pictured below) said the decision was driven by Tesla’s ‘very strong appreciation’ in recent months, with the company’s value increasing by half a trillion dollars ‘without really any fundamental news, any fundamental change’.

‘So, the challenge for us as long-term investors is what do you do with a stock that has appreciated that much, where there hasn’t really been any fundamental driver of that news?’ Slater explained at an investor webinar.

‘Therefore, we’ve made some very significant reductions to Tesla through the past few months.

This trimming of winners also extended to Nvidia, where Burns acknowledged similar concerns about valuation.

‘At different points last year, Nvidia became the world’s most valuable company. When we were trying to do our scenario analysis of what is the upside from here, how do you make several multiples, that became increasingly challenging at those levels,’ Burns said.

‘The initial capital we put in was about £64m, and we’ve been able to take out about £1.5bn of profits effectively.’

Despite the reduction, Nvidia remains a ‘decent size holding’, according to Burns (pictured below) with around £500m invested.

However, the managers voiced concerns about how long the chipmaker can retain its dominance, with Burns pointing to a potential shift in the AI landscape ‘from raw compute driving future performance towards more algorithmic changes’. They envisage this could possibly impact long-term demand.

Slater also noted the cost of AI looks like is it is going to shift from the ‘training stage to the inference stage’. This refers to running live data through an trained AI model to make a prediction or solve a task. Nvidia has dominated the training stage, but Slater said it is likely to face more competition in this next phase.

SpaceX: still grounded (for now)

While the managers trimmed Tesla and Nvidia, they remain bullish on SpaceX, the space exploration company founded by Musk, which is the trust’s largest holding at 7.1%.

Musk’s recent antics have raised concerns among investors about his leadership.

However, Slater said Scottish Mortgage remains ‘comfortable’ holding SpaceX. 

‘I think the changes that you’re seeing in the US are likely to be pretty positive for SpaceX because one of their biggest headwinds has been regulation,’ he said.

The manager expects the US will deregulate the space industry, which would benefit SpaceX.

‘I think the direction of travel today is that you’re going to see more deregulation that will allow the launch cadence to pick up, and that’s the key to generating value in that business,’ he said.

Addressing the possibility of a SpaceX IPO, Burns stated that the company was ‘in a very strong position’ and can ‘choose what they think is the best way to maximize long-term value’.

He added that SpaceX does not currently need capital and has huge demand in the private markets for their shares, hence their ability to withstand pressure to ‘give away value early’ through an IPO.

Navigating China

While geopolitical and regulatory risks have cast a shadow over Chinese investments, Scottish Mortgage hasn’t completely retreated from the market.

Burns said China still possessed some of the world’s most interesting and innovative companies, given its a market of ‘near unique scale’.

However, Scottish Mortgage has significantly reduced its overall exposure to China in recent years, reflecting a more cautious approach.

‘That’s really in recognition of two risks when investing in China,’ Burns explained. ‘The first is a regulatory risk, the second is a geopolitical risk.’

Despite this caution, the trust continues to hold a select group of Chinese companies, including shopping platform Meituan (3690.HK), retailer Pinduoduo (PDD Holdings), and ByteDance, the owner of TikTok. The managers believe these companies offer compelling long-term potential and point to their anomalously low valuations in spite of strong operational performance.

Addressing the recent exits from Alibaba and Tencent, Slater said they are not ‘wholly against’ investing in them again.

‘If we get another opportunity there, I would be equally delighted to retain exposure to the Alibaba Group… I wouldn’t say never because these are some really smart people with some of the best tech in China. We just don’t have that exposure in what is a relatively concentrated portfolio,’ Slatter said.

Staying private

Slater and co-manager Burns also used the webinar to defend the trust’s allocation to private companies, with some investors concerned about the lack of transparency and liquidity in private markets.

Burns said holding private companies gives Scottish Mortgage a ‘huge value add’, providing access to ‘a broader world of insight’, plus the opportunity to generate a very good return.

‘We’ve found it really helpful to get to know companies when they are private number of years in advance before they go public… because you don’t have the pressure of it being listed. I think that establishes a more close and engaging relationship,’ Burns said.

He pointed out that if you look at the top 10 stocks in terms of returns generated for the trust, three are unlisted: SpaceX, Wise and Spotify (which was bought in 2015 before its IPO in 2018).

‘I think the sort of upside from them will range from seven to 13 times,’ he added.

Buybacks buoy performance

The managers also confirmed that the trust has bought back £1.6bn of its own shares since March 2024, exceeding its initial target of £1bn.

This has helped to narrow the trust’s discount from 14.5% to 8.5% since the buyback programme began.

‘I think we’ve made some progress. I don’t think we’re yet where we want to be,’ Slater said.

Looking ahead, both Burns and Slater highlighted robotics, autonomous systems, and AI-driven drug discovery as exciting areas for future investment.

‘What matters to us is owning the world’s best long-term growth companies, being upfront with people that it will be a volatile ride,’ Slater said.

It has certainly been a rollercoaster ride for investors in recent years. Over the past year, Scottish Mortgage’s shares are up an astonishing 40.7%, which compares to 27% by the average trust in the AIC’s global sector.

This followed a challenging period for the global growth trust as valuations of companies held in the portfolio were hit by rising interest rates from 2022. This caused shares in the trust to disappoint over three years, up only 8.5% compared to 23.7% by the sector average. Scottish Mortgage currently trades on a 10% discount to its assets.