By Baillie Gifford
Opportunities like this are rare. In recent years, companies in Scottish Mortgage have faced combined headwinds from slowing growth, reducing earnings estimates and multiple compression. As we move into 2024 and beyond, those headwinds are being replaced by tailwinds.
Growth at a company level remains strong. Profitability is improving well. And to supercharge this, companies in the trust are underpinned by strong structural drivers. We have long said that what matters in the long term for companies is not where interest rates or inflation is; it is deep underlying structural change that generates returns.
Lessons from the past
This quote is from our 2009 Annual Report when Scottish Mortgage had just suffered a c.40% drawdown:
“ We will only abandon our contentions and our stocks when their long run prospects have deteriorated rather than when the dreadful mood of the markets has hurt their immediate valuations.”
We also stated, “The survivors of this shock may be in dominant positions for years to come”. In the following five years, Scottish Mortgage delivered a nearly 200% return for shareholders, powered by companies such as Amazon, Illumina, Google and Tencent.
Being truly long-term matters
Going back to first principles, the purpose of Scottish Mortgage is to identify, own and support the world’s most exceptional growth companies.
We find companies that have sufficient opportunity to deliver outlier returns and we own them for long enough without interference so that the return accrues to our shareholders.
The key takeaway: our philosophy has not changed. We know our approach will never consistently be in favour. We should not deviate from it to avoid short-term headwinds.
If patient ownership of growth companies was easy, more people would be doing it. That is why Scottish Mortgage is different. And why now is exciting.
Structural forces powering change and opportunity
Today, the portfolio is poised for growth amidst digitalisation, the shift towards a post-hydrocarbon economy, AI, and healthcare advancements. These transformational forces are helping our companies generate impressive fundamental growth and give us optimism for the coming years. Here are just a few examples.
Digitalisation: A game-changer
We see digitalisation as a transformative force, especially in underbanked regions. MercardoLibre exemplifies this, dominating Latin America’s digital space with its online marketplace and financial services. Similarly, Pinduoduo’s direct-to-consumer model in China and Coupang’s digital retail in South Korea showcase the potential for growth unrecognized by markets.
Sustainable solutions
Our belief that sustainability also creates opportunity is evident in private company investments like Northvolt’s battery production, Climeworks’ carbon capture, and Solugen’s chemical industry decarbonisation. These companies address broader climate challenges beyond transportation, tapping into the growing demand for renewable energy and sustainable technologies.
AI: A new technology paradigm is born
AI will have a transformative impact, with OpenAI’s ChatGPT marking the start of a new technological paradigm. AI’s potential to enhance platform business models and physical world applications is significant. Roblox and Meta’s ability to leverage AI for content creation and targeted advertising underscores the importance of embracing growth opportunities in this field.
Healthcare: Innovations for better outcomes
Moderna’s success with mRNA technology in vaccines signals a higher likelihood of breakthroughs in various clinical programs, including cancer. AI’s role in diagnostics and healthcare, as seen with Tempus’s genome sequencing and treatment recommendations, points to a future of more effective medicines. Recursion’s drug discovery and 10x Genomics’ cell sequencing further illustrate the potential for significant advances.
Investing in exceptional companies for long-term impact
To conclude, Scottish Mortgage remains focused on a select group of exceptional companies that promise outsized impact over time. The optimism for the portfolio’s future is grounded in the convergence of powerful structural forces which are expected to drive continued growth and profitability over the coming decade.
