Scottish Mortgage bets big on vaccine pioneers

The £19bn trust sees healthcare stocks as the new Amazon, writes Sam Benstead

Britain’s largest investment trust, Scottish Mortgage, is famous for its bold and early bets on technology giants such as Amazon, Tesla and Netflix.

But a deeper look inside its £19bn portfolio reveals something unexpected: the two largest holdings are now healthcare companies and almost a fifth of its investments are linked to life sciences.

DNA mapping company Illumina and biotechnology business Moderna, now a household name thanks to its Covid-19 vaccine, represent a combined 12pc of Scottish Mortgage’s portfolio.

The trust also has holdings in 12 private healthcare companies, such as Tempus Labs, a firm that gathers patient healthcare data, and Recursion Pharmaceuticals, which uses machine learning to aid drug discovery.

Amazon and Tesla, the two biggest contributors to Scottish Mortgage’s stellar returns, have lost out. They now make up just 7pc of the trust between them, down from more than 20pc last year.

Scottish Mortgage’s managers have banked profits from those shrewd investments, which have helped shareholders to an 859pc return over 10 years, smashing the average 196pc from rivals. They have also sold shares in Facebook and Alphabet, owner of Google, after questioning their ability to maintain their rate of growth.

That contrasts with DIY investors, who are still clinging on to shares in America’s tech giants. Tesla and Apple are among their most popular holdings, according to AJ Bell, the stockbroker.

Scottish Mortgage’s managers now see better opportunities from healthcare companies, which they believe can deliver similarly explosive growth to Amazon and Alphabet in their early days. The trust’s legion of DIY investor backers, who own around a third of its shares, will be hoping they are proved right.

Lawrence Burns, newly appointed co-manager of the trust, said the outlook for its healthcare investments was more like that of “digital platform” businesses such as Amazon than of traditional pharmaceutical companies.

Claire Shaw of Baillie Gifford, the fund group that manages Scottish Mortgage, pointed to Illumina’s description of itself as the “Google of genomics”.

Unlike a traditional healthcare company, which makes money from the drugs it develops and sells, Illumina’s business is based on providing the genesequencing technology that allows that development to take place. Like Google, it dominates its rivals, accounting for 90pc of the American market.

Illumina’s technology took just a few days to sequence the Covid-19 genome after it was reported to the World Health Organization. “The implications of faster DNA mapping and falling costs bring us closer to the prospect of personalised medicines and lifestyle plans tailored to our genetic strengths and vulnerabilities,” Ms Shaw said.

Once the Covid- 19 genome was sequenced, Moderna used its technology to crack its code and produce a vaccine. But Baillie Gifford said pigeonholing Moderna as a vaccine producer risked underestimating the company in the same way as investors who viewed Amazon as a bookshop in the early part of this century.

“In the same way that Amazon invested a lot of capital to build its e-commerce infrastructure, Moderna’s chief executive, Stéphane Bancel, has spent years laying the foundations to scale drug development,” Ms Shaw added.

“The technology and delivery mechanisms behind its vaccine programme have been proven and Moderna demonstrates the success of another winning combination: a hybrid between a biotech company and a technology company.”

Investing in healthcare carries plenty of risks, however. Rob Morgan of Charles Stanley, the wealth manager, warned that these businesses required substantial amounts of investors’ money in their early stages of development and not all succeeded.

“Private healthcare companies might end up consuming a lot of Scottish Mortgage’s cash and take away money from other parts of the portfolio,” he said. “These stocks can take time to become profitable and they might never get there. It is a bigger investment risk than owning proven digital winners.”

Despite their risks, Mr Morgan said he expected healthcare companies to occupy a growing portion of the trust.

“Healthcare investments will keep rising in importance as Scottish Mortgage’s private holdings grow larger and eventually list their shares on the stock market,” he said. “We have faith in the managers and their research team to pick the right firms and stick with them through different periods.”

Analysts at Numis, the stockbroker, said the changes to Scottish Mortgage’s portfolio were an encouraging sign. “We take comfort that the managers have not rested on their laurels and have sold companies where they no longer believe there is potential for explosive growth,” they said.

They argued that the trust’s investments could also stand it in good stead should inflation continue to rise.

Shares in the trust took a knock earlier this year as investors began to fear the prospect of higher inflation, which tends to hurt shares in fast- growing companies.

“Several of its holdings are seeking to deliver more cost-effective solutions to drug development, transport and logistics issues and could continue to generate strong returns even in an inflationary environment,” the analysts said.