The fund managers of Scottish mortgage (SMT) have highlighted the incredibly short timeframe in which the companies in their portfolio have been able to bring a Covid-19 vaccine to market, arguing that the rapid advances in computing power and data science are having a transformative effect in areas such as healthcare and transportation have.
Tom Slater, who co-manages the £ 18 billion global mutual fund with James Anderson, said we were witnessing the effects of a digital revolution in areas “far more important” and mirrored the relocation of the trust’s own portfolio from Silicon Valley to more diverse sectors and new innovation centers like the east coast of China.
“If you step away for a second from all of the challenges and negative headlines we saw in 2020, I think one of the absolutely remarkable things about what happened was the efforts of one of our holdings.” Modern to address the situation, and one more of our holdings lighting for providing the tools for that, “said Slater, who received an AAA rating from Citywire for the performance of its open-ended mutual funds including £ 1.4 billion Baillie Gifford Long Term Global Growth.
“In fact, it took four days to find the solution to the Covid crisis,” he said in an online presentation to investors last week.
Slater (pictured) said it took the Ilumina gene sequencer two days to sequence the novel coronavirus. Moderna, which the Trust bought last month, then took two days to take this sequencing data and translate it into an MRNA molecule that triggers an immune response. MRNA is the technology that underlies both its own Covid-19 vaccine and the Pfizer BioNTech shot.
Slater admitted that because of the need for testing and regulatory approvals, it apparently took much longer to get vaccinations up for humans, but still it took companies only four days “to actually find the solution.”
“If you’re trying to measure the effects of scientific advances, the effects of modern technology, the effects of Moore’s Law on the health system, I think you have to look at it that way,” he said.
Moore’s Law refers to Intel co-founder Gordon E. Moore’s prediction in the 1960s that the capacity of microchips would double every two years.
Illumina had a 4% position in Scottish Mortgage in late November and was one of the largest positions. Anderson and Slater bought Moderna in December and, according to the company, had built a 1.5% position by the end of the month.
Technically but not as we know it
Anderson, who has managed the top performing trust in 20 years, said as a rule of thumb that Moore’s Law was “unprecedented” in promoting global growth.
He quoted the European semiconductor manufacturer ASML, a top 10 holding company, a “little-known” but “critical” player in this story, pointing to the advances the company has made with extreme ultraviolet, or EUV, technology in manufacturing the next generation of microchips has made.
Anderson said scientists at the company had told him we were now on an “easy” way to maintain the same rate of increasing processing power for the next 10 to 15 years.
The manager said it was difficult to understand the implications of even a conservative estimate of a 60x increase over the next 12 years, but that it would change the nature of technology as we know it.
“We should think it likely that while we don’t know exactly where this is going, this potential 60x increase will transform entire industries. It’s starting to hit industries way outside of what we define as information technology, ”he said.
In addition to healthcare, the managers have described a number of holdings related to transportation and logistics where these developments opened up massive opportunities.
SMT’s Bumper stake in Tesla, 12.3% in late November, tended to hit the headlines after electric vehicle (EV) stocks rose nearly eightfold in 2020. Chinese EV company NOK also shot to a 5% position after even faster gains. In addition to the momentum toward electrification, managers said self-driving and autonomous capabilities were another and overlooked part of their growth story.
“A business that operated on this scale with margins in software would be extremely attractive,” said Slater.
Slater raised her small stake in. emerged Aurora, a privately owned California company founded by Chris Urmson, a former leader in Google’s self-driving company, building a “virtual driver” for automakers to incorporate into their vehicles. That will allow traditional automakers to compete with Tesla and Google’s Waymo.
The trust also owns small stakes in convoy and Full Truck Alliance, including private companies that operate Uber for Trucking models. Made possible by drivers who have smartphones with them, they automate the “very manual process” of assigning cargo to trucks.
Nuro is another example of making autonomous curb-delivery robots, which Slater said would be an important factor in further reducing home delivery costs. The US company is another unlisted investment that has been made since the end of September.
Zip line provides medical supplies by drone. The company has evolved into a “national infrastructure” in parts of sub-Saharan Africa, delivering blood by air to countries like Rwanda, recently launched in the US.
Finally, Scottish Mortgage is committed to investing in too Charging station, the world’s largest EV charging network, if listed.
The managers have also given up several longstanding holdings with an emphasis on US internet companies. This is due to the more diverse opportunities they find, but also to their assessment that while 2020 accelerated market share gains for many Silicon Valley internet companies, their long-term potential has not increased to the same extent.
Old favorites sold
Google owner alphabet, Messaging app for the workplace Relaxed, Zara owner Inditex and Chinese online travel agency Trip.com were all sold or sold sharply down.
Also at Amazonsaid Anderson, although they were not about to leave the position, “the supply of opportunities has not increased as the stock price has risen.” The fund manager reduced its stake in the Jeff Bezoz-led company for the first time last year for investment reasons, but remained at 6.8% at the end of November.
Last year Scottish Mortgage blew its global competitors with an astonishing 110% total return. This increased the 10 year shareholder return to 873% versus the 179% increase for the MSCI AC World Index.