Morning Note: Market News and an update on Scottish Mortgage Investment Trust.

Market News

Appetite for risk assets improved after President Trump extended the EU tariff deadline from 1 June to 9 July following a call with EU Commission President von der Leyen, largely confirming that Trump’s tariff plans can be regarded as a negotiation tool. This comes after Trump threatened 50% tariffs on the EU due to insufficient progress on talks. The development is welcome but also highlights a broader policy volatility dynamic that is likely to continue overhanging sentiment, with EU equity inflows continuing to outpace US flows.

Japan’s 20-year bond yield slid 19.5 basis points after Bloomberg News reported the nation’s finance ministry asked market participants for their views on the appropriate amount of government debt issuance. US Treasuries rallied as lower Japanese yields, and less supply will reduce competition for dollar-denominated assets. The 10-year Treasury currently yields 4.47%. The dollar rebounded, while gold slipped to $3,310 an ounce.

In Asia this morning, equities were generally firmer: Nikkei 225 (+0.6%); Hang Seng (+0.5%). Following yesterday’s holiday, the S&P futures market is currently predicting a small rise in the US at the open this afternoon. The FTSE 100 is currently little changed at 8,774.

Sterling trades at $1.3564 and €1.1915, while the FT reports the UK Government is shifting to shorter-term borrowing. UK food inflation rose to the highest level in a year as supermarkets battle higher operating costs stemming from the government’s revenue-raising budget. Food price gains accelerated to 2.8% in May from 2.6% in April, the BRC said. The UK plans to train 120,000 British builders, engineers and care workers to curb migration without worsening skill shortages.

Brent Crude drifted to $64 a barrel. Russia’s oil exports are set to remain stable even if the G7 lowers its price cap, Tass reported, citing Deputy PM Alexander Novak.

Source: Bloomberg

Investment Trust Update

Scottish Mortgage Investment Trust is a £13.5bn global equity investment trust run by Tom Slater and Lawrence Burns, two highly regarded fund managers at Baillie Gifford. The fund has a strong long-term performance record compared to its benchmark to beat the FTSE All-World Index (in sterling terms) on a rolling 5-year basis. The fund is actively managed, with a 90% deviation from the index, and an average holding period of more than five years. The manager believes that over long time periods, it is through supporting and holding just a small number of extraordinary companies that exceptional returns can be achieved. However, the manager highlights that investing in such companies at the forefront of structural change means share price peaks and troughs are inevitable, for both the companies the fund owns and the trust itself.

Last week, the company released results for the financial year to 31 March 2025. During the year, the NAV rose by 11.2%, above the 5.5% increase for the benchmark index. The share price only rose by 6.0% as the discount to NAV widened slightly. However, the long-term performance track record remains impressive – over the last ten years, the NAV is up 320% (share price up 276%), versus 182% for the benchmark.

The fund currently holds a small number of high conviction ideas – there are around 95 holdings, although the top 30 account for 80% of assets. The manager targets strong businesses with above average returns that have the potential to double sales over the next five years. In the latest reporting period, the companies have, in many cases, delivered ‘quietly impressive’ operational results. They have grown more resilient, more disciplined, and in several cases, more profitable.

Looking forward, the manager believes the investment landscape is shaped by key themes of resilience, adaptability, and innovation. In a volatile world, resilience is a strategic advantage, allowing companies to adapt and emerge stronger. The rise of AI and digital platforms is reshaping industries, driving operational leverage and creating new market opportunities. The manager’s focus remains on identifying ‘outlier’ companies capable of delivering exceptional returns.

The key themes across the fund continue to include:

-       the merging of healthcare and technology, with innovative treatments being developed faster and cheaper than ever.

-       the move away from carbon-based energy generation and transport towards electrification and renewables.

-       the digital transformation that has revolutionised the retail, media, and advertising industries broadening into fields such as food, finance, and enterprise.

The manager has previously highlighted that when considering AI investment opportunities, it can be helpful to divide them into three layers: hardware (e.g. Nvidia, ASML, TSMC), infrastructure (e.g. cloud providers, such as Amazon, and database companies), and applications (that make productive use of AI in the real world, such as Meta Platforms). The manager believes that in order for this technology to be truly transformational, it must become ubiquitous, and that implies commoditisation and margins that may not be sustainable. As a result, the position in Nvidia was reduced substantially in favour of companies that will benefit from the broader adoption of AI tools, such as Meta Platforms – the manager believes AI will improve Meta’s products (Facebook, Instagram, and WhatsApp) and its business model provides many options for funding the necessary computing capacity.

The portfolio is global – only around 3% is listed in the UK – and so offers good geographic diversification. The high weighting to the US (60%+) brings exposure to the global centre of entrepreneurial excellence but also to a highly-rated stock market. Regarding China, the manager believes the investment backdrop has improved. Government rhetoric has turned to supporting private-sector job creation, and valuations, once priced for ruin, have started to recover. Although the manager remains alert to risks, including geopolitical frictions and potential tariffs, he recognises that China remains home to an enormous, educated, and entrepreneurial population and a huge share of global GDP. With roughly 13% of the portfolio now invested in Chinese companies, overall exposure is being managed but with an eye on compelling long-term opportunities. The fund’s holdings have been performing well – Meituan, the food delivery company, has successfully maintained its dominance, and Pinduoduo, the ecommerce platform, has achieved strong growth in export markets through Temu.

At the end of April 2025, the largest holdings in the fund were: Space Exploration Technologies (7.8%); Mercado Libro (Latin American e-commerce platform, 6.9%); Amazon (5.3%); Meta Platforms (4.3%), and Spotify (3.7%).

The fund has reduced its weighting in several companies, including Tesla following a doubling of the share price in 2024. Several smaller holdings have been exited where the growth outlook has changed. These include HelloFresh, as the meal-kit market’s potential seems more limited now, and Zalando, which is facing increased competition from companies leveraging the Chinese supply chain.

New holdings includes Revolut, the UK-based financial technology company that offers a range of banking services through its app. The manager regards Revolut as a leader in the new generation of bundlers, combining the synergies of classical universal banking with the modern software of fintech. It is regarded as an asymmetric investment with significant upside potential. The fund also increased its weighting in Atlas Copco, a global leader in compressors, pumps, and power tools.

The manager believes the long-term risk taking, essential to economic and social progress, is continuing to migrate to private markets. At the end of April 2025, the fund had 26% of its assets in 51 unquoted investments (of which 61% is in five companies), providing exposure to early-stage businesses that investors would not usually be able to gain access to. Although this increases the level of volatility in the fund, the manager believes these investments provide the potential for asymmetric returns, with a maximum 100% loss set against the potential for unlimited upside. The fund’s private company exposure tends to be weighted to the upper end of the maturity curve, focussed on late-stage private companies which are scaling up and becoming profitable.

The group believes the market’s scepticism around the performance and valuation of its private assets is misplaced, and that they will be a significant source of value creation for the fund in the coming years. The manager aims to hold private company investments at ‘fair value’, i.e., the price that would be paid in an open-market transaction. Valuations are adjusted both during regular valuation cycles and on an ad-hoc basis in response to ‘trigger events’. The valuation process ensures that private companies are valued in both a fair and timely manner. The company revalues the private holdings on a three-month rolling cycle, with one-third of the holdings reassessed each month. During the year, the average change at the company level in the private company portfolio was -5%, although the average change of the top 10 private company valuations was +40%. While the manager can’t predict when the funding environment for private companies will improve, they are confident in the quality of the companies, many of which are self-sustaining, and remain patient, supportive investors. During the year, £132m of new capital was deployed in private companies.

Scottish Mortgage is in a robust financial position. The fund continues to deploy a ‘strategically appropriate’ level of gearing in the portfolio as the board believes this offers a potential source of additional value for shareholders over time. However, given the level of volatility in markets and the repayment of debt facilities, the current level of gearing is only 13% of NAV. The manager also highlights that rising rates have little impact on the company. During the years of exceptionally low interest rates, the company proactively extended the term of its debt, while the interest cost of just over 3% is well below the Bank of England base rate.

Although the focus of the fund is capital growth, the company has committed to paying a small dividend – with these results, a payout of 4.38p has been declared, up 3.3% versus last year.

The size of the fund helps to keep costs low, with an ongoing charge of 0.31% for the year. This is much less than most actively managed funds invested in public equities and significantly less than private equity funds.

Given its growth/technology bias, this equity fund is at risk from falling stock markets, particularly if highly-rated stocks fall out of favour or their valuations are questioned. The use of gearing, combined with investment in private companies, and the concentrated nature of the portfolio also leads to significantly greater volatility compared to the peer group.

Having traded at or around NAV for years, since 2022 the shares have traded at a discount, which widened to around 20% in 2023. In response, the company has been buying back its shares. Most importantly, in March 2024, the board announced the company would make available at least £1bn for the purpose of buybacks over the following two years. Since 31 March 2024, the company has repurchased £1.9bn of its shares (15% of the market cap., and as result, the discount to NAV has narrowed substantially, although it remains sizeable (currently 10%) and the board and the managers remain committed to the continuation of the buyback.

Source: Bloomberg