Over the six months to the end of September, both Scottish Mortgage’s net asset value (NAV) and price per share rose by 25% on a total return basis; for context, the FTSE All World Index rose by 18% over the same period. All three of these figures were favourably influenced by the falls in the pound against other currencies over the period, raising the sterling value of overseas assets.
Earnings per share were 0.80p over the six months to 30 September 2016 compared with 1.23p for the same period last year, which represents a fall of 35%. This is a continuation of the trend of lower earnings, which has been highlighted repeatedly in the Company’s reports in recent years. The fall is due to the large number of companies in the portfolio reinvesting for their future growth, rather than paying out cash to shareholders. A modestly increased interim dividend of 1.39p per share will be paid, representing a rise of 0.7% over the previous year’s figure of 1.38p.
The report says that, over the past six months, a number of the largest holdings in the portfolio have released strong operational results, showing a re-acceleration of their growth rates. These include Alphabet (Google), Facebook, Amazon, Alibaba, Baidu and Tencent. They say that the long standing common elements contributing to their success include: strong corporate cultures, driven by their founder/managers; a focus on providing what their customers either want or need; and a willingness to invest for the long term to enable them to adapt to, and increasingly to anticipate, their customers’ evolving demands.
They think that these network businesses now seem to have reached a critical tipping point, whereby their sheer dominance and scale become a reinforcing competitive advantage. This stems from the developments within machine learning and artificial intelligence (AI). The increased level of global connectivity, through the combination of the relatively new infrastructure of the mobile internet, social media and smart devices, has produced an explosion in the proliferation of data. The volume of this is now so great that no human could hope to curate the content. It will require machine learning and AI to process it. The leaders in these fields need access to the best data sets, produced by the largest networks. They say that it is no accident that Baidu, Alphabet, and Facebook are leaders in this area. Machine learning in particular is an iterative and accelerating process, meaning that it becomes increasingly hard to catch up with those at the forefront. Those who succeed will be able to offer better services based on the technology to their customers. The Managers have accordingly sold out of those second tier network businesses which they believe will be the losers in this next round, such as Twitter and LinkedIn. In contrast, the Managers have recently invested in a company, NVIDIA, which designs graphics processing units (GPUs). The company is the dominant provider of GPUs and currently its main market is the computer gaming industry. However, the processing structure of a GPU is better suited to the computational tasks required to support virtual or augmented reality, AI and autonomous vehicles, than the alternative central processing units used in traditional computing. This dramatically expands the company’s potential addressable markets.
The managers believe that the importance of data, or more accurately the real time processing of vast volumes of data to support new business models and technologies, has moved beyond the area traditionally thought of as ‘information technology’. This shift is happening much faster than many realise and will eventually impact almost every industry.
Within the portfolio there are a number of other companies, outwith the technology sector, taking advantage of these developments. Electric cars are really driven by their software. Improvements in data gathering and real time processing have enabled technology to reach the stage where the adoption of autonomous vehicles is largely a matter of time and acceptance, rather than of technological capability. Tesla is at the forefront of this. The requisite hardware for such capability now comes as standard on all new Tesla vehicles, and it will simply require an ‘over the air’ software update in the future to activate it. Our understanding in the field of genomics has seen a step change resulting from the data produced through gene sequencing. As well as the testing company Illumina, there are now a number of companies in the portfolio which are developing potentially curative treatments for a range of diseases as a direct result of this. These are, however, still at an early stage. Further, we are now entering the stage of the commercialisation of our understanding in this area as it applies to the wider field of biology. The Managers have recently invested in Ginkgo Bioworks, a company looking to industrialise biological processes to manufacture a range of products, such as rose oil, for use in the food and cosmetic industries.
SMT : Scottish Mortgage bets on the strong getting stronger