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Flow of opportunities abound for Schiehallion

Baillie Gifford’s Schiehallion Fund (MNTN) has released interim results covering the six months to 31 July 2020. Over the period, NAV per share increased by 4.3% while the shares delivered a return of 8.2%.

Manager’s report from Baillie Gifford – ‘62% of the capital raised had been invested by the end of July’

“The global spread of COVID-19 has brought about a quantum of societal change that we would normally expect to see over years or decades in just a few monumental months. As the world went into lockdown, we reviewed each of the companies held in the portfolio to determine their resiliency. We categorised them as red, amber, or green based on how well placed we thought they were for weathering the storm.

Like many others, we braced ourselves for short term pain. And some companies felt that pain. Holdings in the travel industry, in particular, saw their revenues decline rapidly. However, most of our holdings did not miss a beat! Those that suffered have now largely bounced back, far quicker than we might have feared back in the dark days of March and April, and during the six months to 31 July 2020, the company’s NAV increased by 4.3%.

We thus find ourselves wondering whether we have not overestimated the near-term impact of COVID-19. As long-term investors, one of the behavioural inefficiencies we seek to exploit is the propensity for humans to overestimate the pace of change in the short-term, but to underestimate it in the long-term. It is thus natural that we now find ourselves pondering what the longer-term and as yet underappreciated ramifications may be.

In the meantime, many of our portfolio companies are flourishing. Scopely and Epic Games, both social gaming companies, are seeing strong user engagement and corresponding revenue growth as we all find new ways to spend time with our friends and families in a world of social distancing. Other companies are thriving for more idiosyncratic reasons. Whether it is Allbirds’ successful launch of their new running shoe, The Dasher; or SpaceX’s eagerly anticipated Crew Dragon mission to launch people into space, it is reassuring to be reminded that the whole world does not revolve around COVID-19.

Certainly, looking at the flow of new opportunities over recent months, you would never guess that we were operating during a pandemic. Since the end of January, we have invested in seven new companies. The diversity of what these companies do, and by extension the lack of correlation between the success or failure of each, is striking. To pick out a few, Grail is developing blood tests to detect early-stage cancer when it is easier to treat and survival rates are higher; Graphcore is developing chips on which to run cutting edge artificial intelligence algorithms, and Epic Games is changing the nature of digital entertainment with Fortnite and the Unreal Engine.

Of equal focus has been supporting existing holdings in the portfolio. In the last six months, we have made nine follow-on investments. Many of these were a result of companies bolstering their balance sheets to remove any financing risk given the uncertainty caused by COVID-19. This has enabled us to build on our positions in some exceptional companies such as Stripe, Tempus, TransferWise and Warby Parker, to name but a few. Initial construction of the portfolio has been deliberately flat, with initial holdings in companies being largely the same size. However, this will change as the portfolio matures, with larger positions emerging to reflect both underlying performance and our growing conviction in those opportunities.

As of the end of July, 62% of the capital raised in MNTN had been invested in high growth private companies. Over the coming months, we will likely have the opportunity to deploy more capital into some holdings as they enter public markets.

MNTNwas founded on the belief that we could deliver attractive returns by investing shareholders’ capital in great private companies, that we could then own for the long-term once they became public. With Airbnb and Grail both filing to go public, we are likely to get our first taste of this within MNTN. We are not approaching the IPOs of these companies as liquidity events. They are merely the next steps on the journeys of great companies that have the potential to grow over decades.”

MNTN: Flow of opportunities abound for Schiehallion

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