Scottish Mortgage to invest in more 'unicorns'

At the end of the January the trust had 12.5 per cent invested in private names, up from 10 per cent in November 2015 and 5 per cent in September 2015. At the trust's annual general meeting in June it will propose setting a limit of a quarter of the trust's assets, in a move that could increase the risk level of the portfolio, but also increase its exposure to high-growth household names such as streaming service Spotify.

A yes vote would set the trust apart from the majority of global growth trusts, which invest mainly in listed companies. The private market is more opaque and less accessible to investors, but is also where a raft of major tech 'unicorns' have been raising easy money in recent years, enabling them to swell to billion dollar valuations without need to turn to public markets. Scottish Mortgage argues that capital markets have fundamentally changed, and in order to access more companies like current holdings Airbnb, Survey Monkey and Dropbox, it needs more exposure to private markets.

Scottish Mortgage said in its 2015 interim report: "The trend of companies preferring to raise capital in the private markets and list on a public stock exchange much later in their development has progressed further and faster than expected. This is an extremely important shift for growth investors who primarily invest in the public equity markets, as it results in a loss of access to a considerable period of value creation in these exciting growth companies."

But tech unicorns were at the centre of bubble fears last year, with investors concerned that their lofty valuations would not be borne out in the event of a crash or when they entered public markets. Many have crashed down to earth following their initial public offerings (IPOs), trading far below their private valuations.

But investing in private stocks is also often associated with early-stage, higher-risk businesses, with low or no earnings stream. However, Scottish Mortgage said its favoured unlisted stocks are "not immature venture-capital-style businesses, but established, often highly cash-generative companies," which would have previously been accessed through the public equity markets. Many of those within the portfolio, such as Spotify, are already global brands."

Scottish Mortgage said its investment remit is not changing and that the type of company it invests in remains the same. "The increase in the level and number of such unlisted investments within the portfolio in recent years has been in direct response to a shift in the balance within the capital markets between the providers and consumers of capital, rather than a change in the managers' investment philosophy and approach," said the trust's board.

Scottish Mortgage remains a stellar performer and one of the top-performing trusts in its sector, having returned more than 200 per cent in 10 years, compared with just 67.8 per cent for the Association of Investment Companies Global sector. Managers James Anderson and Tom Slater run a high-conviction portfolio of growth stocks and the theme of technological disruption runs throughout their selections.

See next week's issue for our in depth update on Scottish Mortgage Trust with manager James Anderson

Scottish Mortgage Investment Trust unlisted holdings as at 31 January

Source: Baillie Gifford