Scottish Mortgage: It took our stocks four days to solve Covid


The fund managers of Scottish Mortgage (SMT) have highlighted the incredibly short timeframe in which the companies in their portfolio were able to bring about a Covid-19 vaccine, arguing that the rapid advance of computing power and data science is having a transformational effect in spheres like healthcare and transport.

Tom Slater, who manages the £18bn global investment trust with James Anderson, said we were now witnessing the effects of a digital revolution in areas that were ‘a lot more important’, echoing the shift in the trust’s own portfolio away from Silicon Valley to more diverse sectors and new centres of innovation like the east coast of China.

‘If you move away for a second from all the challenges and negative headlines that we saw in 2020, I think one of absolutely remarkable things about what happened was the efforts of one of our holdings Moderna to address the situation, and another of our holdings Illumina for providing the tools for that to happen,’ said Slater, who has gained a top Citywire AAA-rating for the performance of his open-ended investment funds, including the £1.4bn Baillie Gifford Long Term Global Growth.  

‘In effect, it took four days to find the solution to the Covid crisis,’ he told investors in an online presentation last week.

Slater (pictured) explained it had taken gene sequencer Ilumina two days to sequence the novel coronavirus. Moderna, which the trust bought last month, then took two days to take that sequencing data and translate it into an MRNA molecule which triggers an immune response. MRNA is the technology underpinning both its own Covid-19 vaccine and the Pfizer-BioNTech shot.

Slater acknowledged it had obviously required a lot longer for vaccinations to be ready for use on people due to the necessities of testing and regulatory approval, but nevertheless, it had taken the companies only four days ‘to actually find the solution’.

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‘If you’re trying to measure the impact of scientific progress, the impact of modern technology, the impact of Moore’s law on the healthcare system, I think you have to think of it in those terms,’ he said.

‘Moore’s Law’ refers to the prediction of Intel co-founder Gordon E Moore in the 1960s that the capacity of microchips would double every two years.

Illumina was a 4% position in Scottish Mortgage at the end of November and one of the biggest holdings. Anderson and Slater bought Moderna in December and had built a 1.5% position by the end of the month, according to the company.

Tech but not as we know it

Anderson, who has managed the top-performing trust for 20 years, said as a rule of thumb Moore’s Law remained of ‘unparalleled importance’ in driving global growth.

He cited European semiconductor manufacturer ASML, a top 10 holding, as a ‘little-known’ but ‘critical’ player in that story, referencing the advances the company has made with extreme ultraviolet or EUV technology being used to produce the next generation of microchips.

Anderson said scientists at the company had told him we were now on an ‘easy’ path to maintaining that same rate of increasing processing power for the next 10 to 15 years.   

The manager said it was difficult to get one’s head round the implications of even a conservative estimate of a 60-fold increase over the next 12 years, but that it would change the nature of ‘tech’ as we know it. 

‘We should take it as likely that, although we don’t know precisely where that goes, there will be whole industries transformed by that potential 60-fold increase. It’s beginning to hit industries well outside of what we define as information technology,’ he said.

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Other than healthcare, the managers detailed a number of holdings connected to transport and logistics where these developments were creating opportunities at a massive scale.

Transformed transport

SMT’s bumper stake in Tesla, 12.3% at the end of November, has tended to grab the headlines after the electric vehicle (EV) company’s shares surged nearly eight-fold in 2020. Chinese EV company NIO has also shot to a 5% position after even more rapid gains. Beyond the momentum towards electrification, the managers said self-driving and autonomous capabilities represented another and overlooked part of their growth story.

‘A business that would operate at that scale with software-type margins would be extremely attractive,’ said Slater.

Slater highlighted their small holding in Aurora, a private Californian company founded by Chris Urmson, a former leading light of Google’s self-driving business, which is building a ‘virtual driver’ for car manufacturers to integrate in their vehicles. That will allow the traditional car-makers to compete with Tesla and Google’s Waymo.

The trust also owns small stakes in Convoy and Full Truck Alliance, also private companies operating ‘Uber for trucking’ type models. Enabled by drivers carrying smartphones, they automate the ‘very manual process’ of matching freight load to trucks, with machine learning able to eke out efficiency gains in freight that are impossible with phone calls.

Nuro is another example, producing autonomous robots to do ‘kerbside delivery’, which Slater said would be an important enabler in continuing to drive down the cost of home delivery. The US company is another unlisted investment, made since the end of September.

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Zipline provides medical deliveries by drone. The company has become akin to ‘national infrastructure’ in parts of sub-Saharan Africa, delivering blood by air in countries like Rwanda, and has recently launched in the US.

Lastly, Scottish Mortgage has also made a commitment to invest in Chargepoint, the world’s largest EV charging network, when it lists.

The managers have also exited several long-time holdings, with a focus on US internet companies. That is down to the more diverse opportunities they are finding, but also due to their judgement that while 2020 accelerated market share gains for many Silicon Valley internet companies, their long-term potential has not carried on increasing to the same extent.

Old favourites sold

Google-owner Alphabet, workplace messaging app Slack, Zara-owner Inditex and Chinese online travel agency Trip.com have all been sold or heavily sold down.

Even in the case of Amazon, Anderson said while they were not about to exit the position ‘the opportunity set has not carried on increasing to the degree to which the share price has increased’. The manager trimmed their holding in the Jeff Bezoz-led company on investment grounds for the first time last year, but it remained a 6.8% position at the end of November. 

Last year Scottish Mortgage blew away its global rivals with an astounding 110% total return. This lifted its 10-year shareholder return to 873% versus the 179% gain for the MSCI AC World index.



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