Winterflood analyst Shavar Halberstadt has fleshed out the reasons for including Scottish Mortgage (SMT ) in the broker’s New Year recommendations after the Baillie Gifford flagship’s investor forum in London last week.

Halberstadt said SMT fund managers Tom Slater and Lawrence Burns had impressed him with their conviction in the mix of public and private companies held by the £11bn global growth portfolio.

After a painful crash, that saw tech company valuations lose all their gains in the 2020 pandemic boom, shares in the former top performer halved from their peak in November 2021 as interests surged, and stand at a 10% discount to net asset value.

‘With most portfolio holdings valued below pre-pandemic levels due to interest rate increases, the likely peak of interest rates implies the elimination of a headwind,’ said the analyst.  

At the meeting the managers discussed the trust’s key investment themes, most notably artificial intelligence (AI), which the pair were particularly bullish about. Slater believes the release of ChatGPT in late 2022 was a ‘paradigm shift’ even though the cycle may appear overhyped in the short turn.

Revenue generation driven by AI was already visible in the accounts of holdings such as chipmaker Nvidia, cloud offerings by Amazon, cloud-based data warehousing platform Snowflake and Databricks, which allows customers to use machine learning to analyse data. 

Consumer-facing beneficiaries include gaming company Roblox, with significant AI-driven improvements to user-created content.

There is no clear picture yet on winners in the AI-driven software space, but once identified, the managers will accept ‘growth at an unreasonable price’ to gain exposure, Halberstadt summarised.

For example, having sold Meta in June 2020, the pair repurchased the Facebook operator in October after the shares had surged 247% over the previous 12 months. The Nasdaq-listed company’s currently repents just 1% of SMT. Its share price of $374.49 has risen 19% since the end of October and trades at 34 times earnings in anticipation of a surge in profits.

Other portfolio changes include reducing exposure to Dutch semiconductor company ASML, which has been in the portfolio since 1996, because lithography will see a smaller share of semiconductor expenditure going forward, they believe. The company remains SMT’s largest holding at 6.5% of assets.  

AI complements other aspects of the portfolio, such as healthcare, with advances in AI driving innovation that could see an era of more effective drugs.

This includes 10x Genomics’ ability to sequence a single human cell while pharmaceutical company Moderna expects to make significant progress in cancer vaccines and rare diseases, alongside respiratory viruses.

In terms of other company updates, Slater said private logistics company Zipline recently attained Federal Aviation Administration approval for commercial drone delivery in specific locations, while Upside Foods, which provides lab-grown meat, is now served at a California-based Michelin-starred restaurant.

The managers were bullish about several of their private holdings going public as soon as market conditions allow, such as Northvolt, which produces lithium-ion batteries, personalised cancer diagnosis company Tempus, Elon Musk’s SpaceX, which includes satellite company Starlink, and TikTok owner ByteDance. Private companies constitute 29% of assets out of a 30% limit.

‘The managers displayed a range of creative ideas, which is exactly what investors should seek from SMT. Moreover, the private allocation has been used to good effect in gaining access to positions that competing funds simply cannot offer,’ Halberstadt concluded, adding that there are lots of catalysts to rerate the shares from their current 759p to their previous peak of £15.29. 

‘Should sustained technological advances combine with a more hospitable macro environment and an eventual portfolio IPO, we foresee excellent prospects for SMT to party like its 2021,’ he concluded.