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52. Uncovering Trusts – Scottish Mortgage Investment Trust (SMT): Unique low-cost access to exceptional growth companies across public and private markets
136 Plays10 days ago
In this episode, our director of content for investment companies, Milosz Papst, talks about Scottish Mortgage Investment Trust (SMT), the UK’s largest investment trust and one of the most widely recognised names in the AIC Global sector. He introduces the trust and its managers’ philosophy of identifying and holding the world’s most exceptional growth companies, before discussing SMT’s distinctive private company exposure – including the April 2026 shareholder vote to expand the investment limit – and key portfolio holdings such as ByteDance, Mercado Libre and SpaceX, which now represents around 19% of total assets following a March 2026 revaluation. Milosz also covers recent portfolio activity, with five new positions initiated in Anthropic, AppLovin, CATL, Figma and RedNote.
Milosz then turns to SMT’s strong long-term performance record, with NAV total returns ranking first among the nine funds in the AIC Global sector over the last one, three and 10 years, and annual NAV total returns of 18.3% over the last decade. He concludes by outlining the trust’s other notable features, including its 43-year record of consecutive annual dividend increases (placing it among the AIC’s dividend heroes), its recent return to trading at a small premium to NAV, the board’s active share repurchase programme, its use of gearing, and an ongoing charges ratio of 0.31% – the lowest in the AIC Global sector.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers around 50 investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to 'Uncovering Trusts'
00:00:05
Speaker
Welcome to Uncovering Trusts, the Edison Group podcast where we explore some of the most interesting investment trusts on the market. I'm your host, Liam O'Byrne, and today I'll be talking to Milos Papps, Director of Investment Company Content at Edison, to discuss our recent initiation of Scottish Mortgage Investment Trust, ticker SMT. Milos, thanks for joining us today.
What is the Scottish Mortgage Investment Trust?
00:00:26
Speaker
and So yeah, as the largest company in the AIC database, excluding private equity investor three i most people will already be somewhat familiar with Scottish mortgage. However, of course, as we cater to a wide audience, please could you just start with a brief introduction to the trust?
00:00:42
Speaker
Hi, Liam. First of all, thanks for having me. Yes, sure. So Scottish Mortgage Investment Trust, or SMT, was founded in 1909 and is listed in the UK Top 100 Company
Investment Approach of SMT
00:00:53
Speaker
Index. um Since inception, it has been managed by Billy Gifford, a privately owned investment company with more than £200 billion pounds in assets under management or device. The trust managers are Tom Slater, who is lead manager, and Lawrence Burns, deputy manager, who aim to identify, own, and support the world's most exceptional growth companies. They have an unconstrained bottom-up approach, investing for the long term in both public and private companies to maximize shareholder total returns via primary capital, but also dividend growth.
00:01:28
Speaker
The managers do not make asset allocation decisions or try to time the market. SMT's portfolio typically holds between 50 and 100 diversified positions. ah There are no set limits on geographic um sector or industry exposure, and a maximum 8% of total assets is in a single holding is permit permitted at the time of
Private Investments and Revaluations
00:01:51
Speaker
investment. Great, thanks.
00:01:53
Speaker
So one of the most important features of Scottish mortgage is its meaningful exposure to private companies. Could you just walk us through these? Yes, of course. um I would like to talk more about private companies later in the in the episode, but this is a timely discussion as until recently private company exposure was limited to 30% of total assets at the time of purchase.
00:02:16
Speaker
However, on the 10th of April, 2026, shareholders unanimously unanimously voted for a change in the trust's investment policy, which grants the board the ability to allow the managers to invest a further £250 million pounds in the private companies ah once the 30% limit has been reached.
00:02:35
Speaker
A large revaluation of the trust's largest holdings, holding SpaceX in December 2025, moved its percentage of total assets from around 8.2% 15.1%. then another revaluation, March 2026, moved further up around 19%.
00:02:48
Speaker
and then another evaluation march twenty twenty six moved it further up to around nineteen percent and um ongoing share repurchases reduced the asset base, which essentially locked the trust out of ah participating in follow-on or exciting new private investments.
00:03:05
Speaker
While the £250 million pound potential ah further private company investments just a low single-digit percentage of total assets, it is broadly comparable with the around £300 million pounds in initial and follow-on private investments the trust made over the last two years.
00:03:23
Speaker
Great, thank you. That's useful background.
SMT's Investment Philosophy
00:03:26
Speaker
Now, just ah taking a step back, could you you just walk us through the management's philosophy that drives their investment process? Yes, sure. This is um straightforward, but very important.
00:03:36
Speaker
The fact is that the majority of stock market returns are generated by a very small number of companies. These are outlying businesses that exploit the asymmetric payoff of equity investments.
00:03:48
Speaker
ah The maximum loss is 100%, whereas the maximum upside can be many multiples of of an original investment. um Although Scottish mortgage has a good performance record, ah more on that later, and its portfolio is liquid and low cost, um the investment style means that there can be periods of performance volatility.
00:04:07
Speaker
I see. So with the philosophy in mind, how is the portfolio constructed? Yes, so the process takes the managers six core beliefs into account. Firstly, long-term patient capital. The managers believe that it takes at least five years for companies to demonstrate their competitive advantages and managerial excellence, and that in general, the investment management industry is, well, too short-term focused.
00:04:31
Speaker
Secondly, the focus on finding the few exceptional companies. Their internal research has shown that over the last 30 years, only around 5% of stocks have gone up at least five times in any five-year period.
00:04:45
Speaker
ah Then, SMT's managers also aim to learn from external sources. ah They have little confidence in quarterly earnings releases and sell-side research. Instead, they focus on other sources of information.
00:04:59
Speaker
Their fourth core belief is in unconstrained opportunity. Slater and Burns are wholeheartedly growth stock investors. ah They look for extraordinary growth that often requires little fixed assets or capital. um they need to They need to be willing to pay high multiples of immediate earnings due to the dramatic potential and so future returns.
00:05:22
Speaker
They also put emphasis on meaningful relationships. Bailey Gifford believes that um investment management is a relationship business, hence its responsibilities to ensure strong governance and engage with firms.
00:05:36
Speaker
And finally, low cost. um Limiting fees for shareholders is an imperative as the negative effect of high fees on long term total returns is frequently underestimated. Great, thank you. So with the philosophy and process covered, can we now move on to allocation within the portfolio? Sure.
Portfolio Allocation and Top Holdings
00:05:54
Speaker
i'm ah Given the managers long-term investment approach, the majority of investments have been held for more than five years.
00:06:00
Speaker
um Position sizes are determined by a stock's potential upside rather than market capitalization. At the end of February 2026, there was an allocation of around 37% to 53 private companies with a, well, 63% allocation to 48 public companies.
00:06:19
Speaker
The top 10 positions made up around half of the portfolio with the largest geographic weight in North America at around 57%. Now, a snapshot analysis of Scottish mortgage versus its All World Preference Index at the end of December 2025 showed that it had superior historical and estimated growth in both sales and earnings, which understandably came at higher valuation multiples. um However, the trust portfolio was more resilient with less debt to equity than the index. Great, thank you. and yeah Can you just tell us some more about some of Scottish mortgage's largest holdings? Yes, um here are a few of the top 10 names. Bydance is a global technology company that makes it easier and well more fun to create and consume content ah with SMT's first investment in 2019. Its products include the short form video platform TikTok and the company has expanded into news aggregation, gaming and education.
00:07:16
Speaker
ByteDance's competitive advantage is using AI to change how content is distributed. um Its algorithm learns the types of things a user enjoys watching and automatically personalizes their feed, which significantly increases engagement.
00:07:31
Speaker
Unlike um other social media platforms, ByteDance has been successful within China and internationally, which mitigates geopolitical risk to some extent. um It monetizes its applications via precision advertising.
00:07:45
Speaker
The second example i would pick is MercadoLibre, which hosts the the largest e-commerce and payments ecosystem in Latin America um with first investment in 2020. The company is working to improve the relatively low e-commerce penetration in the region via a reliable digital commerce platform, improved logistics and affordable finance.
00:08:07
Speaker
including the previously unbanked customers. MercadoLibre is run by its founder and CEO, Marcos Gaperin, who has developed a corporate culture whereby long-term investment is prioritized over ah short-term profitability.
00:08:22
Speaker
And of course, I have to mention SpaceX, which was founded by Elon Musk in 2002 with the trust's first investment in 2018. um Many of our listeners will be familiar with the company, but just to cover off the basics, um SpaceX designs, manufactures and launches advanced reusable rockets and spacecraft.
00:08:42
Speaker
Via innovation and vertical integration, the company has developed a series of cost and capability improvements that are transforming the space industry with reusability, which is a key competitive advantage. SpaceX is also expanding Starlink, a satellite constellation for global internet connection, which is rebuilding the internet in outer space.
00:09:04
Speaker
Starlink is disrupting the telecoms and internet sectors and has grown by serving a wide range of customers, including aviation and maritime subscribers and other users in remote areas.
00:09:16
Speaker
That's great. Thank you. And what about recent portfolio activity?
New Investments and Disposals
00:09:19
Speaker
Well, despite the long term focus, um the Trust Portfolios actively managed to take advantage of prevailing opportunities. In the first half of its 2026 fiscal year, there were five new holdings, three listed and two private companies, and two complete disposals, along with additions and trims to portfolio names.
00:09:39
Speaker
um Let me briefly list the five um new investments. The Trust made a private investment in Anthropic, which is at the forefront of AI development with its flagship product Claude, a family of large language models I'm sure our listeners are familiar with.
00:09:55
Speaker
Aplovin is a leading advertising technology company with a dominant role in mobile gaming, which is a rapidly expanding part of the digital economy. Then CAPL is the world's leading EV battery micup maker with 40% global market share Then Figma is a collaborative cloud-based design platform that creates a single space where designers and developers can visualize and so build digital products and experiences.
00:10:25
Speaker
And Rednode is a private Chinese social media and e-commerce platform blending user-generated lifestyle content, product reviews, and in-app shopping for its 300 users.
00:10:37
Speaker
Kinevik, an investment company in Wayfair, an online household goods retailer, was sold. That's great, thank you. and But now moving back, given the high interest in the trust private companies, and these as we discussed earlier, can we spend some more time talking about
Strategy on Late-Stage Private Companies
00:10:50
Speaker
these?
00:10:50
Speaker
Of course. Scottish Mortgage made its first investment in a private company in 2012, And at the end of December 2025, it was invested in six of the eight largest private companies. The managers generally focus on late-stage private companies that are scaling up and becoming profitable.
00:11:10
Speaker
So the as of the end of um December 2025, 73% of the private company exposure was cash generative, with a similar percentage capitalized at more than $10 billion. dollars selection of the trust's public holdings were originally private company investments, including um for instance, Spotify Technology, which IPO'd in April 2018, Weiss, with an IPO in July 2021, Temples AI, IPO in June 2024, and MateOne, IPO in September 2018.
00:11:44
Speaker
I believe that this illustrates that Scottish mortgage can access attractive growth companies when they are private, um in many cases generating outsized returns ahead of an IPO, and also run winning companies after they have listed. While the valuation of private companies is less transparent than for listed companies, there is a well-structured process for ah value trusts private holdings. That's great. And moving on now to a very important important topic for investors.
SMT's Performance and Challenges
00:12:12
Speaker
How has the trust performed? Could you give us an overview?
00:12:15
Speaker
Well, the short answer is very well. There are nine funds in the AIC global sector and SMT's NAV total returns ranked first over the last one, three and ten years. Its five-year results were negatively affected by growth-style headwinds and valuation compression in a rising interest rate environment, primarily in 2022. Now, looking at the trust returns versus world indices, once more, there is outperformance over one, three and ten years, but underperformance over the last five years. ah
00:12:45
Speaker
Part of the reason why its relative performance has not rebounded since 2022 is likely due to investors having well a higher degree of risk aversion in response to adverse geopolitical events. That's great. And unfortunately, we're nearing the end of our podcast today. But before we do, are there any other features of the trust that you'd like to discuss?
Dividend Policy and Valuation
00:13:05
Speaker
Of course, let us start with dividends. The Trust Board employs a progressive dividend policy to satisfy its objective of both capital and income growth.
00:13:16
Speaker
albeit dividends are likely to make up a small part of total returns as growth companies tend to reinvest for the future rather than return return cash to shareholders. ah Dividend growth is accelerating as it compounded at an annual rate of 6.2% over the last five years compared with 4.1% over last decade.
00:13:36
Speaker
The trust has had 43 years of consecutive annual dividend increases. This places it 12th out of 20 funds that have earned a place on the IAC's list of dividend heroes. So funds with at least a 20-year unbroken record of higher annual distributions.
00:13:56
Speaker
Moving on to valuation, the trust has recently returned to trading at a small premium, having re-rated from a 9% discount at the start of the year. Over the last three years, its valuation range was a 3.2% premium to a 22.7% discount. We think that the trust may continue to trade above par, as prior to 2022, it regularly traded at a small premium.
00:14:20
Speaker
um There is no formal discount premium policy, but the board will act when there is a significant supply-demand imbalance. um On the 15th of March 2024, the board committed to at least £1 billion pounds for share repurchases over the following two years, ah but this level has been exceeded by, well, a wide margin.
00:14:40
Speaker
um Gearing is used to enhance the trust's long-term returns. A maximum of 30% of total assets is permitted using debt instruments with different durations that can be denominated in foreign currencies, as well as sterling.
00:14:54
Speaker
At the end of f eight twenty five the average cost of debt was and the trust currently has net debt position. um In terms of fees, the board is keen on low costs to allow shareholders to keep as much of the total re returns as possible, which is particularly important when the returns are compounded over the long term.
00:15:15
Speaker
So the annual management fees, 0.3%, up to £4 billion pounds of total assets, less current liabilities, and 0.25% on the remaining assets. um It is charged to capital as, well, this is the primary source of long-term shareholder returns.
00:15:31
Speaker
The FY25 ongoing charges ratio of 0.31% was four basis points lower year-year, and i would note that this is the least expensive ongoing charges ratio in the EIC global sector and around half the sector average.
00:15:48
Speaker
um The board considers that the trust's ongoing charges are very attractive, given it provides exposure to both public and private companies at a lower cost than both listed equity and private equity equity funds. Thank you, Milos. Well, we've certainly covered a lot of ground today. and Just to close our discussion, it may be useful to give us a summary of what Scottish Mortgage offers and why time-pressed investors may benefit from looking at this particular trust.
Summary and Future Prospects
00:16:13
Speaker
Yes, that's a good idea. So Scottish Mortgage provides exposure to exciting long-term growth opportunities, with the managers aiming to generate strong long-term total returns from a portfolio of listed and private growth companies.
00:16:25
Speaker
This approach has proved very successful with annual NAV total returns of 18.3% over the last decade, which is considerably ahead of the All World Reference Index. The Trust's performance ranks ah first among the nine funds in the EIC global sector over the last 1, 3 and 10 years.
00:16:42
Speaker
Its largest position is Space Exploration Technologies, so SpaceX, which makes up around 19% of the portfolio following a March 2026 revaluation. um SpaceX entered the portfolio in 2018 and the position size was increased in 2021.
00:16:58
Speaker
um The combined ah investment of around £200 million pounds is now worth around £3 billion. pounds ah The managers are very bullish on SMT's prospects, given a wealth of interesting opportunities available across the globe in both developed and emerging markets. Fantastic. Thank you, Milos. Well, that is
Conclusion and Further Resources
00:17:16
Speaker
it for today. um However, it is worth pointing out that we now have over 50 podcast episodes in our series.
00:17:22
Speaker
all of which are available from your normal podcast provider. You've been listening to Uncovering Trusts, a podcast by Edison Group. For more information on Scottish Mortgage and other investment companies we cover, please visit edisongroup.com.