Scottish Mortgage: The reasons we're looking to China and private businesses for outstanding returns

When it comes to generating growth, Scottish Mortgage will do whatever it takes to find outstanding long-term returns, including in China, unicorn businesses, and industries like space exploration

The Scottish Mortgage Investment Trust (LSE: SMT) has a "pretty simple" goal: "we want to own the world's most exceptional growth companies, wherever we find them, and be long-term patient owners," according to trust manager Tom Slater. Tariffs may have alarmed the markets.

A well-liked trust among investors is Scottish Mortgage. Established in 1909, it is currently included in the FTSE 100 and the investment trust portfolio of the BFIA.

Despite their devotion to the established trust, some investors might still be uneasy after shares fell 45 percent in 2022 as the market turned against growth companies during the pandemic.

Slaters' assurance in pursuing growth may be comforting, but he clarifies that the trust is "not for everybody" despite the fact that investors may be experiencing anxiety once more as a result of tariffs keeping the markets tense.

"Investors need to acknowledge that there will be volatility and that we are investing in a highly uncertain world. I don't believe that trying to control volatility in the stock market is the best course of action if you're worried about it. You may invest in less volatile assets, but I believe you must be willing to tolerate equity market volatility and prioritize return over risk.

Slater informs BFIA that the trust will invest in China, do not shy away from unicorns, and search the world for the best opportunities.

Investing in privately held businesses.

"And the best companies just happen private," Slater says, referring to the trust's main goal of investing in exceptional growth companies for exceptional returns.

"We've had to enter private companies in order to preserve our opportunity set, which is one evolution of our approach over the last 15 years.

He continues by saying that the trust operates without regard to national boundaries in order to access the greatest businesses and take advantage of the major themes and opportunities.

"If you take Zipline as an example, which specializes in autonomous drones for medical deliveries and increasingly for general merchandise and food, then that's going to be a private company," concludes Slater.

Scottish Mortgage owns more than half of the ten most valuable unicorns in the world.

At 8 percent, Space Exploration Technologies (Space X) is its largest holding, followed by Argentine e-commerce company MercadoLibre.

Additionally, it owns financial companies like Stripe and Revolut.

We're willing to support the management teams of companies that we identify as having outstanding growth potential over the long term. And we will allow those roles to grow into important positions where we perceive the opportunity to be expanding and the probability of success to be rising.

We believe that's how stock markets and long-term returns are made; it's the few big winners you manage to hang onto, that you don't eat away at in the name of risk control or risk reduction, but rather that you carefully consider the opportunity and the upside and stick to those positions.

For you, is Scottish Mortgage trusts and volatility?

Even though investors typically experience volatility, Slater notes that certain risks associated with Scottish Mortgage may make volatility more severe and cause anxiety in certain investors.

"We will generate a return that differs significantly from benchmark indices. We'll be erratic. For that, we don't apologize. Determining what we're attempting to accomplish in people's portfolios and why they ought to own Scottish Mortgage is, in my opinion, one area where the board has truly assisted us over the last 15 or 20 years. However, we aren't for everyone," he clarifies.

Slater acknowledges that although active managers are compensated to find outstanding businesses in order to generate a high return, they occasionally make mistakes and incur losses.

However, losses can also be offset by extraordinary profits. "Last year, we made more money from our investment in SpaceX than we did from our investment in Northvolt," he claims. "I believe that illustrates how crucial it is to get the big winners because they cover the inevitable losers you encounter along the way.

"Ignore China at your peril" applies to investing in China.

Despite the fact that many investors are fleeing China, Slater contends that there may be some of the greatest opportunities here, pointing out a significant discrepancy between the country's 3 percent market share and its 20% share of the global economy.

Given that there are some amazing entrepreneurs in China and that people can actually operate at a scale that has proven more difficult for Western businesses, we believe that ignoring China is a risky move.

Consider BYD, a Chinese carmaker that we bought last year and that has come out of this fiercely competitive domestic EV market. You must be doing something truly right if you want to dominate that market and merge profitably at scale. You must be thin. You must be starving. And for that reason, I believe, they are the only company in the world that produces EVs comparable to Tesla. And that's the reason why Europeans haven't really put up a strong showing in this fieldthey're competing with businesses like BYD. China cannot be ignored, in my opinion.

AI: Scottish Mortgage will no longer invest over £1.33 billion in Nvidia.

The trust showed what it means to invest early in a business by investing 65 million in Nvidia in 2016 and selling 11.3 billion of Nvidia stock last year to profit from the sale. Nvidia rose to become the fourth-largest corporation globally in 2024.

Slater said there were questions about whether the margins were sustainable even though the trust is closely monitoring AI.

"AI is a general-purpose technology that will be widely used because it is so important. But it needs to be inexpensive in order to be widely used. Earlier technological waves, such as laptop PCs, laptop computers, and mobile devices, were fueled in part by their steadily declining costs. Consequently, we have adopted the stance that, although some of the capabilities of AI systems are truly remarkable, they are simply too costly. And their prices must continue to drop in order for them to become widely available.