Morning Note: Market news and an update from Scottish Mortgage Investment Trust.

Market News

Global equity markets are moving higher this morning on hopes the US is nearing a shutdown resolution. A group of Democrats broke with their party and voted to support a deal to end the longest-ever shutdown. The Senate voted 60-40 to re-open government in a procedural test vote and will now require the consent of all members to advance. The Bill would fund key departments for the full year and other agencies through to 30 January and also restore pay for furloughed workers while halting new layoffs.

Meanwhile, the Federal Reserve’s John Williams told the FT the next rate decision will be a balancing act between high inflation and a resilient economy. He warned of mounting strain on lower- and mid-income earners.

President Trump has suggested giving most Americans $2,000 funded by tariff revenues collected by the US administration, while the White House is said to be working on the option of a 50-year housing mortgage. Gold has bounced 2% in response this morning to $4,080 an ounce.

In Asia this morning, equities rallied: Nikkei 225 (+1.3%); Hang Seng (+1.6%); Shanghai Composite (+0.5%). According to Goldman, American investors are buying Japanese equities at the highest level since October 2022, Goldman said.

The FTSE 100 is currently 0.7% higher at 9,747, while Sterling trades at $1.3175 and €1.1380. Diageo has been marked up 7% following the announcement that Dave Lewis will be the group’s new CEO. The appointment of the former Tesco boss has been well received given he was responsible for turning around the ailing food retailer. Prior to that, Lewis spent nearly three decades at Unilever, leading on both marketing and business performance.

Visa and Mastercard are close to a deal to settle a two-decade legal row with merchants, under which they will cut interchange fees, a person familiar said.

Source: Bloomberg

Fund Update

Scottish Mortgage Investment Trust is a £15.5bn 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 an 88% 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, 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.

At the end of last week, the company released results for the financial half-year to 30 September 2025. During the period, the NAV rose by 22.9%, above the 15.4% increase for the benchmark index. The share price rose by 20.9% as the discount to NAV widened slightly. The long-term performance track record remains impressive – over the last ten years, the NAV is up 472% (with the share price up 400%), versus 263% for the benchmark.

The manager believes the investment landscape will be 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). AI is reshaping how businesses operate and how decisions are made. The infrastructure powering that change is in high demand. But progress is not limited to computing. The manager believes we are seeing progress in areas as diverse as personalised healthcare, electrification, logistics, and digital content.

The fund currently holds a small number of high conviction ideas – there are just under 100 holdings, although the top 30 account for 77% 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, strong returns reflected a growing market recognition that the companies driving fundamental technological and economic transformation have emerged from recent volatility with strengthened competitive positions.

The portfolio is global – only around 3% is listed in the UK – and so offers good geographic diversification. The high weighting to the US (c. 50%) 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 c. 15% of the portfolio invested in Chinese companies, the fund’s overall exposure is being managed but with an eye on compelling long-term opportunities.

At the end of September 2025, the largest holdings in the fund were: Space Exploration Technologies (7.6%); MercadoLibre (Latin American e-commerce platform, 5.4%); TSMC (4.6%); Amazon (4.3%); Meta Platforms (4.0%).

In recent months, the manager has introduced a number of new holdings that reflect how the global economy is changing. While the sectors vary, the companies share important traits: they are founder-led, ambitious, and well placed to benefit from long-term shifts in technology, consumer behaviour and energy. These included Figma (design tool for building websites, apps and digital services), AppLovin (a company that helps mobile games and apps reach the right audiences through better advertising), CATL (the world's largest battery maker, which supplies electric vehicle and energy storage companies), and Anthropic (a company building the next generation of AI). These new positions have been funded from reductions in holdings in Amazon, Roblox, Spotify, Meta Platforms, Netflix, Tempus AI, MercadoLibre, and Shopify. However, the manager remains supportive of the long-term potential of these companies and in all cases retains meaningful positions.

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 September 2025, the fund had 26% of its assets in 52 unquoted investments, 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.

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 has fallen to 11% 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 half-year payout of 1.6p has been declared, in line with last year. The yield is currently 0.4%.

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 then, the company has repurchased £2.6bn of its shares (21% 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