SpaceX helps Scottish Mortgage Investment Trust take off

Scottish Mortgage Investment Trust revealed the extent of the success of its early backing for Elon Musk’s SpaceX on Wednesday. 

The buy-and-hold investor’s stake in the rocket maker now amounts to about a fifth of the £16bn fund, as revealed in its results for the year to the end of March. 

Overall, SMT’s net asset value in the year to the end of March rose by over 27 per cent. 

Christopher Samuel, the FTSE 100 constituent’s chair, pointed to “a significant upward revaluation” in the SpaceX holding amid “continued strong operational execution”.

It left the operator of the global Starlink satellite web access network as SMT’s “largest holding by some margin”. The stake rose in value by 179 per cent over the year. 

“This highlights both the importance of access to leading private companies and the extent to which a small number of exceptional investments can drive long‑term returns’, Samuel added.

The extent of SMT’s current dependence on SpaceX comes as the pioneering off-world company prepares to transform itself from a privately held firm into a publicly listed company via a blockbuster, $1.75 trillion initial public offering, or IPO. 

In the City, attention focused on the potential implications of the landmark floatation for SMT, especially with SpaceX powering its returns to such a dominant extent. 

City gets in on SpaceX IPO

SMT is also seen as a route into the IPO, given the extent of its existing holding. 

Tom Slater, the manager of Scottish Mortgage Investment Trust, said the contribution from SpaceX amounted to “a degree of concentration which is highly unusual for us”.

He added: “It would be remiss not to acknowledge the potential for volatility that comes with a position of this size.” 

But he pointed out that  “SpaceX should no longer be thought of as an aerospace contractor but as a dual monopoly: the world’s dominant launch provider and a global connectivity utility with the potential for software-like margins.”

Slater, who has been running the fund since 2015 after six years as its deputy manager, spoke of the dynamics at work within SpaceX.

He said: “Though launch vehicles generate the media attention, the valuation has been driven primarily by its satellite communications subsidiary, Starlink, which is building the kind of predictable, highly profitable revenue that the best software businesses aspire to. 

“The difference is that its assets are in orbit and extraordinarily difficult to replicate. 

“SpaceX should no longer be thought of as an aerospace contractor but as a dual monopoly: the world’s dominant launch provider and a global connectivity utility with the potential for software-like margins.”

‘Attractive long-term opportunities’

The SpaceX floatation on the US stock exchange will be a landmark moment for markets as well as the company. 

It could establish the firm among the most valuable in the world, although there has been controversy over the headline valuation. Its 200,000 word IPO prospectus mentioned data centres in space, asteroid mining and the development of regular transports to the moon and Mars. 

Along with such space age detail, the IPO comes with down-to-earth implications for current backers of the venture. 

It will include a lock-up period in the run up to the share sale, when private shares in SpaceX cannot be sold. Nonetheless, SMT and other early SpaceX backers, can hold their stakes through the transition and on into the future. 

As Slater pointed out “a listing changes the venue in which a company’s shares are traded. The opportunity and our reasons for owning it remain the same.”

Emma Bird at City broker Winterflood said the IPO, at the valuation suggested, would “represent another seven per cent uplift on Net asset Value” for SMT. 

“We continue to rate the managers of SMT highly, and expect them to be able to recycle these proceeds into attractive new long-term growth opportunities,” she added. 

SMT is managed by Baillie Gifford, but is separately listed and has FTSE 100 status in its own right. The firm is a long-term investor in high growth companies and is known for backing the likes of Nvidia, the AI chip maker and Alibaba, the giant Chinese web retailer, as well as electric car maker Tesla, another Musk firm. 

It also has staked in music streamer Spotify and the online game Roblox. 

AI generational opportunity for SMT

City AM analysis found that based on the $1.75 trillion valuation for the SpaceX IPO, Baillie Gifford is in line to break records with its bet on the firm, returning £3.5bn from it across its four flagship investment trusts. 

That would be one of the largest such returns in UK investment history. Baillie first backed SpaceX in 2018.  

Matthew Hose, equity analyst at Jeffries, said the IPO “represents a key juncture for the position and the trust as a whole”. He said the overall results “highlight limited portfolio activity, but continued very strong performance from the private investments”. 

IPO lock up periods could become a familiar pattern for SMT’s tech investments. It also has holdings in other debut candidates in Anthropic and Databricks in the artificial intelligence sector, alongside Bytedance, the owner of Tiktok, and Stripe, the online billing platform. 

SMT views AI as a generational opportunity. Samuel called it “the early stages of a profound technological transition”, which SMT is meeting with a “long-term, globally unconstrained approach”, including “maintaining exposure to selected Chinese companies where compelling opportunities exist”. 

He added: “Artificial intelligence is not simply another incremental innovation; it has the potential to reshape industries, alter competitive dynamics and change where value accrues across the economy. 

“As with previous paradigm shifts, the ultimate winners are unlikely to be obvious in advance and may emerge from different geographies, sectors and stages of development.”

‘More challenging’ investment environment

SMT said today that, more generally, its brand of long term investing has been through “a more challenging period”. 

The travails of “growth investing … continues to influence the company’s five-year record”, but called its annual results for the year to the end of March “encouraging”. 

Samuel added: “As in previous years, we emphasise that one year is too short a timeframe over which to assess performance. Our focus remains firmly on long-term outcomes, and the board continues to believe that the portfolio is well positioned to deliver attractive returns over time.”

SMT launched in 1909 and made pioneering investments in rubber into the boom in car ownership sparked by the Model T Ford. It also backed Chilean railways and telegraph companies in Cuba. 

It was an early international investor in Japan, when rules over foreign investment there were loosened in the 1980s. When the dot-com bubble burst in the early 2000s, SMT doubled down on its long-term strategy for its global portfolio, looking at a  time horizon of five years. 

Having backed Amazon, Tencent and Tesla, it made it onto the FTSE 100 in 2017. 

On Wednesday, Scottish Mortgage Investment Trust’s own stock rose 0.5 per cent to 1.528p, taking it up almost 55 per cent in the last year, and over 30 per cent in five years.