Scottish Mortgage on AI, new holdings, and its edge over trackers

In the second part of our Insider Interview with Scottish Mortgage Ord (LSE:SMT), deputy fund manager Lawrence Burns tells Kyle Caldwell how the investment trust has three levels of exposure to artificial intelligence (AI), and provides lots of examples of companies held in the portfolio.

Burns also outlines his views on growing concerns that the world’s biggest businesses are overspending on AI development.

Other topics discussed include performance, with Burns addressing both the underperformance of the past five years and much more favourable three-year returns. He also shares his latest view on Nvidia, and runs through two of the newest additions to the portfolio.

A selection of questions was submitted by interactive investor customers on our social trading network ii Community. Responding to one question, Burns explains the two advantages Scottish Mortgage has over global tracker funds.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I have with me Lawrence Burns, deputy fund manager of Scottish Mortgage Investment Trust. Lawrence, thanks for coming in today.

Lawrence Burns, deputy fund manager of Scottish Mortgage Investment Trust: Thank you for having me.

Kyle Caldwell: So, Lawrence, Scottish Mortgage invests in various themes. Could you provide an overview of the key areas of focus at the moment?

Lawrence Burns: I think one of the advantages of Scottish Mortgage is that it exposed to a wide variety of mega-trends around the world. One of the big ones is obviously artificial intelligence (AI), where we have exposure at the hardware layer, the infrastructure layer, and the application layer. But again, it’s the diversity that really matters.

Our largest holding is about the future of the space economy. We have holdings that are exposed to the revolution in digital financial services, such as Revolut, operating primarily in Europe, Nu Holdings Ltd Ordinary Shares Class A (NYSE:NU), operating primarily in Latin America, and we also have investments in companies that are really at the pinnacle of luxury with Hermes International SA (EURONEXT:RMS) and Ferrari NV (MTA:RACE). So, there’s a wide variety of exposures.

Energy transition would be another one, where we own BYD Co Ltd Class H (SEHK:1211), the world’s largest electric vehicle manufacturer, and Contemporary Amperex Technology Co Ltd Ordinary Shares - Class H (SEHK:3750), the world’s largest battery manufacturer.

I think what is really interesting about this position that we’re in right now is that there are so many changes of profound growth potential that we see.

Kyle Caldwell: Could you put a figure on the amount of exposure Scottish Mortgage has to artificial intelligence? And could you provide a bit more of a flavour of the types of companies that you own?

Lawrence Burns: I think any figure is going to be somewhat misleading, so I’m going to take a step back and try and explain that.

If you look at AI, as I said before, [we have] three levels of exposure. Take the hardware; we own NVIDIA Corp (NASDAQ:NVDA), which designs the AI chips, and graphics processing units (GPUs). We own Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) that fabricates chips, and we own ASML Holding NV (EURONEXT:ASML) that provides lithography machinery to help that fabrication process.

Nvidia isn’t even 100% AI, but it’s mostly AI. With TSMC, maybe around 20%, 25% at the very most of their revenue, is going to be AI accelerators. The rest of it is that it has a 90% share of advanced chip manufacturing of all types of chips. Similarly, ASML supports that. So, even then, none of the companies are necessarily, certainly with TSMC and ASML, 100% AI.

As you move to the infrastructure level, you have Amazon Web Services, where a big driver is, of course, AI, but Amazon Web Services is also not just about AI. There’s also Amazon.com Inc (NASDAQ:AMZN) retail that focuses into that. We have a holding in Anthropic, that’s an AI frontier model company, and that would be 100% AI.

If you move on to the application layer, we have some companies that are using AI at the core, Aurora Innovation Inc Class A (NASDAQ:AUR) for autonomous trucking, Horizon Robotics Class B (SEHK:9660) for autonomous passenger vehicles.

But a lot of the companies at the application layer are companies like Spotify Technology SA (NYSE:SPOT), the global music streaming giant, where we invested in 2014. Our investment case had nothing to do with AI, we just think it’s a great business with a growing market opportunity. AI makes that business better by improving the tools that are available to users, improving the cost space, but it doesn’t make the investment case. It’s an additional optionality.

We have a lot of companies where AI isn’t a core part of the investment case, but we think AI could make them be a better business. So, that’s why giving a percentage figure, I think it depends, percentage of revenue, percentage or value, it becomes quite tricky. But I think when you take a step back, we feel that we’re well exposed to some the positive trends around AI, but without it dominating the portfolio exposure.

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Kyle Caldwell: Artificial intelligence has plenty of future growth potential. However, there are concerns about the amount of money that the world’s biggest businesses are spending on AI development. What’s your view on that?

Lawrence Burns: The figures are staggering. I think a lot of them would say $650 billion (£484 billion) spent by the hyperscales in 2026 is the latest estimate. That seems staggering until every company you speak to starts telling you how important AI is becoming for their business.

Whether they’re a bank, a digital platform, companies in manufacturing even. They start telling you, actually, we think this is going to potentially accelerate our revenue or help us reduce costs.

And what you see is that, actually, there’s a supply constraint. The problem is not demand here, the problem is supply.

Last year, we took a holding in Anthropic, a leading frontier model company. Their journey really typifies just how much demand there is for AI as a product, as a solution, as a service.

At the start of last year, they had a revenue run rate of about $1 billion. They’re thought to have exited this year, 2025, on a run rate of about $9 billion. OpenAI have numbers that are even higher than that, and are also growing very fast, and that’s just two of the AI model companies.

So, what I would say is that there is huge demand for these services and products. This is a real technological revolution that is being monetised today.

But at the same time, every big technological build-out has bumps along the way, and we need to be prepared and recognise that, [while] not dismissing that this is probably the most important technological development of our lifetimes.

Kyle Caldwell: Is it also important to scrutinise how companies are spending the money on AI developments and whether that money is being spent through debt?

Lawrence Burns: I think that’s helpful to look at when you’re thinking about the overall sustainability. But I think if you take a step back, which are the companies that are spending the money on AI?

A lot of it is backstopped effectively by the hyperscalers, who were some of the most richest and profitable businesses in the world, Microsoft Corp (NASDAQ:MSFT), Amazon, Alphabet Inc Class A (NASDAQ:GOOGL).

And they see this not just as important to future growth, but an existential thing for them to be investing in. They’re often founder-influenced or driven companies as well. That means that they can focus on the long-term benefits of that investment.

Kyle Caldwell: Scottish Mortgage has a long-term investment horizon. Could you talk through the typical portfolio turnover and run through recent portfolio activity over the past couple of months? Could you outline some of the newest holdings in Scottish Mortgage?

Lawrence Burns: Portfolio turnover is about 10% and that obviously implies an average 10-year holding period in line with what we talk about, that five- to 10-year time horizon.

In terms of recent purchases, I’ll give a couple of different ones. RedNote is a Chinese company. We don’t have something quite like it in the West. It’s like a social community, it is a combination of Reddit, it a combination TikTok, it is a combination of search.

It’s got a growing user base, in excess of 350 million monthly active users. It’s under-monetised and it’s growing very, very rapidly. It’s a private company and it is also looking to expand internationally, again, because the business model is distinct and different from what we have in other markets. So, that would be one new holding in China.

Another one would be one that we’ve touched on already, but I think it’s worth talking a bit more about, so Anthropic. Anthropic has had that phenomenal revenue growth. It’s probably one of the fastest-growing companies in the history of the world. We really like it because it’s focused on AI safety, and that’s particularly appealing to enterprises.

So, while ChatGPT and OpenAI is focusing on the consumer market, Anthropic with Claude is focusing on the enterprise market. And I think at the end of the day, that’s one of the markets that’s going to get the most use out of AI. It’s not about generating videos or asking Q&A questions, it’s about how do I make my business more successful? So the ability to monetise that and to monetise the value of cutting-edge AI there is really very, very strong. So that’s two examples.

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Kyle Caldwell:A holding that used to have a much larger position, although it is still a top 10 holding, is Nvidia. Could you outline your latest views on the company?

Lawrence Burns: I think our stance is positive. It’s still a decent-size holding within the portfolio. It is central to the development and roll-out of AI, where the real question is, how many chips can they supply to their customers? Itt has a very strong competitive position. At the same time, it used to be a 10% holding. So, why have we taken that down?

That’s because when we did our scenario analysis, what we found was that it was very hard for us to imagine a scenario where it was going to be a $15 trillion company. So, we’ve taken the weighting down to reflect how we feel about the upside from here.

If you look for its journey, it really does typify the type of outlier we try and own. We invested about £64 million in Nvidia. We’ve taken out about £1.5 billion already of profit and we still have £500 million invested. So, I think in many ways that typifies the ideal journey of a company that delivers outlier returns and we’ve been able to harvest them.

There’ll still be more to come, but it just doesn’t quite - versus the other opportunities we have - justify the same holding size that we had in the past.

Kyle Caldwell:I next wanted to turn to performance. There was a weak period of performance at the time during which interest rates started rising. That period of weak performance is still reflected in the five-year performance figures. Over that period, the share price total return for Scottish Mortgage is around 5% at the time of this recording. Now, the three-year performance figures, they’re much more favourable. The share price total return is up nearly 80%.

Are you confident that performance is back on track and how would you ask shareholders to judge your performance? Is there a particular timescale?

Lawrence Burns: So, what we’d tell shareholders is to judge us over periods of at least five years or more. I think the longer time horizon you have, the more sense Scottish Mortgage makes for you as an investor.

So, if you zoom out a bit further and you look over 10 years, the numbers are also very strong, up about 430% or so over the last 10 years, which is well ahead of global indices.

You’re also quite right that the five-year period now looks far more disappointing. That’s reflective of it being measured from the peak of our performance back into 2021 where you had the Covid period.

Fortunately, now, as you rightly pointed out, performance, like you said, of around 80% over three years is looking very, very different. I think we’re confident that our opportunity set is there, that our edge as investors is there to be able to deliver long-term returns. They’ll be volatile over time, but we’re very confident about the ability to deliver value for shareholders over the long term.

If there was a simplistic reason why, it would be that what we’re seeing today is a greater pace of change across the world and across different trends and areas.

AI is one part of that, where given the changes you’re seeing in AI, to have some exposure to that makes sense, but it’s also about the energy transition, it’s also about space economy, it is also about digitisation of emerging markets.

So, we’re seeing trends, if anything, accelerating and being more diversified than we have before and that gives us confidence to be able to provide our shareholders with really interesting exposures globally.

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Kyle Caldwell: I’m going to move on to a couple of questions we’ve had from interactive investor customers on our social trading network, ii Community. The first one asks, where do you think Scottish Mortgage should sit in a drawdown pension portfolio? A core holding, speculative or diversified holding?

Lawrence Burns: If we go back to what Scottish Mortgage is trying to do, I think it’s really helpful if you’ve got a 30-year pension and you need to combat inflation because it’s going to give you great capital growth.

At the same time, because it focuses on growth on innovation, its pathway can be volatile. So, I think everyone should have some exposure to Scottish Mortgage and it should form a core diversified part of a growth component of that, but it should never be all of someone’s exposure.

Again, if you take a step back, I think the real importance over the long term is that Scottish Mortgage is giving investors a stake in the future of the economy and insurance against technologically driven disruption. I think that’s really important for long-term savings and investment.

Kyle Caldwell: The next customer asks, what makes Scottish Mortgage a better option than a passive global tracker fund for a retiree given its volatile performance in recent years?

Lawrence Burns: So, I think indexes are great and I think they have some drawbacks. The first drawback is that they’re created from all the companies that have been successful in the past - they’re based on past success.

I think Scottish Mortgage provides two key advantages versus an index fund. The first advantage is that we’re hunting for the next trillion dollar company, and so we’re giving you exposure to the future winners, not the winners of the past.

The second big advantage is that companies are staying private for longer, and therefore if you’re investing in a tracker, you’re not getting exposure to some of the latest AI companies like Anthropic. You’re not getting exposure to SpaceX, for example, and the tremendous rise that it’s had.

And that, I think, becomes a really important missing component from trackers. So, Scottish Mortgage is able to provide both public and private exposure for those future companies, and that, I think, gives two really important differences from what an index fund can provide.

Kyle Caldwell: The final question is regarding Scottish Mortgage’s discount. At the time of this recording, the discount is around 3%. However, its one-year average discount figure is 10%. The customer asks, what is the board’s view on the ongoing discount? Is further action planned beyond share buybacks to close the discount?

Lawrence Burns: I think the view is that this isn’t a trust that should trade at a meaningful discount, and we’ve been doing a very large buyback programme for a long time now. We’ve spent, since the last announcement, £2.5 billion, and the plan is to continue to have that buyback on the belief that this is not a trust that should trade at a material discount.

Kyle Caldwell: Finally, Lawrence, do you have skin in the game?

Lawrence Burns: Yes, I invest in Scottish Mortgage every month and I’ve never sold a single share of Scottish Mortgage.

Kyle Caldwell: Lawrence, thank you very much for your time today.

Lawrence Burns: Thanks for having me.

Kyle Caldwell: That’s it for our latest Insider Interview. For more videos in the series, do hit the subscribe button and hopefully I’ll see you again next time.