Interactive Investor

Scottish Mortgage: our latest thinking on AI, Elon Musk and China

26th June 2023 12:00

by Sam Benstead from interactive investor

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The trust’s managers answer questions on the biggest themes affecting its share price today. 

Scottish Mortgage Investment Trust 600

Scottish Mortgage investors were given the chance to grill fund managers Tom Slater and Lawrence Burns on their disappointing share price performance, and investment views last week.

The trust’s shares have fallen 10% this year, well below the 30% gain for the Nasdaq or 6% gain for a global shares tracker. It is below even the 1.5% loss for the FTSE 100 so far this year.

At an event at the Savoy hotel in London the fund managers provided an update, including insights on how the fund is positioned to win from emerging technology trends, such as artificial intelligence (AI), as well as new information on two of their most controversial bets: Elon Musk and China.

These are the big questions the managers of the £9.5 billion trust, which trades on a 19% discount, provided answers to.

How are you exposed to artificial intelligence?

AI is the hottest theme in the investment world right now, with stock pickers scrambling to make sure their portfolios contain some of the winners from this new and potentially groundbreaking technology.

Tom Slater said the hype was real and that Scottish Mortgage was well exposed to leading players, including chip companies ASML and Nvidia, Amazon via its cloud computing division, and data and cyber security companies Snowflake, Databricks and Cloudflare.

He said: “We have been commenting on progress in artificial intelligence for some time and we saw some meaningful breakthroughs in the past year. At the risk of hyperbole, we could be entering another computing paradigm akin to what we have seen with personal computing and then with the smartphone.

“AI can already augment human software programmers and enhance productivity, and AI services will likely write most computer code in the future.”

However, despite deliberately positioning the portfolio to win from the AI theme, the trust’s performance this year does not reflect that.

This is because they haven’t owned most of the huge American technology companies that are regarded as the biggest beneficiaries of AI: Microsoft, Alphabet (the Google owner), Meta (the Facebook owner), and Apple.

Nevertheless, when asked why they did not own these companies, the pair said they are open to investing in them once again if they are confident that they can return to faster growth rates.

Why do you still invest in China?

Burns and Slater recently returned from a trip to China, and left feeling optimistic about the companies they own there, despite selling some investments last year.

Slater said: “A lot there has changed in the past four years since we were last there. We significantly reduced our holdings last year, but we still have about £1.8 billion invested there.

“It was encouraging to see that our holdings there have started to grow again as lockdowns fade away and the regulatory environment has become a lot more business friendly.”

He noted that Chinese e-commerce company Pinduoduo was Scottish Mortgage’s best-performing stock in 2022, something he says shows that focusing just on where a company is based is not enough.

Slater adds that China is leading on clean energy technology, which makes it an exciting place to invest.

He said: “The most striking thing for me when we were in China was a scale on pacing investment that we're seeing into electronification, into electric vehicles infrastructure, as well as renewable energy generation.

“It is clear that they are a long way ahead of us down this route to electrification. Tesla Inc (NASDAQ:TSLA)’s future competition is far more likely to come from Chinese manufacturers that you have never heard of, such as BYD, than it is to come from Ford or General Motors Co (NYSE:GM),” he said.

Has Elon Musk lost the plot?

Another source of contention for Scottish Mortgage investors has been the continued backing of Elon Musk and his two companies, Tesla and SpaceX.

The entrepreneur bought Twitter last year and became CEO, before handing over responsibility earlier this month. He is also involved in a building firm (The Boring Company) and neuroscience, via Neuralink.

Tesla is 5.2% of the portfolio, while SpaceX, which runs an internet service delivered via satellites and provides space shuttle services to the US government, is 3.6%. SpaceX is a private company.

Slater said: “We bought Tesla in 2013, and it had quite a rocky time until the launch of the Model 3 (in 2017). Since that point, the execution of the company has really been phenomenal.”

He says that factories in China and Germany show that the company is able to execute their business plan well.

Slater says: “That is about the team around Elon Musk. He has the drive and the big idea and the engineering knowledge, but you need the operational expertise in between those two things to actually make it happen. And I think that has been really important in driving the Tesla share price.

“SpaceX has always had that with chief operating officer Gwynne Shotwell. She has been really important in driving commercial execution. Has Elon Musk lost the plot? Ordinary people don’t change the world. Having that big vision and the bloody-mindedness to pursue it is a really important ingredient of what's been achieved.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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