Scottish Mortgage open to adding more cryptocurrency exposure

Scottish Mortgage has lifted the lid on why the global trust has dipped its toes into cryptocurrency.

Scottish Mortgage (LSE: SMT) is open to backing other cryptocurrency-related businesses following its $100 million (£72 million) investment in Blockchain.com, which we reported on in April. 

Tom Slater, co-manager of Scottish Mortgage, lifted the lid in an investment webinar on why the global trust has dipped its toes into cryptocurrency.

He said: “What is fantastic about bitcoin and the associated technology is digital scarcity. There are all sorts of interesting applications that follow on from that.”

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Slater adds the technology is “still extremely young”, and that as with other investments the trust hands capital to a key focus is “finding companies run by interesting entrepreneurs”.

Slater, who will become the trust’s lead manager at the end of next April when fellow co-manager James Anderson retires, said “hopefully there will be more opportunities” to back other cryptocurrency-related firms in the future.

But he pointed out: “We are not investing in bitcoin as an asset class, it is a company that operates in the ecosystem.” 

While the stake of Scottish Mortgage’s investment in Blockchain.com is small, representing around 0.4% of its assets, it attracted plenty of headlines and interest. The reason why is because until very recently professional fund managers have been shying away from investing in cryptocurrency, with the view often that the asset class and by extension the companies than operate within it are too volatile, risky and speculative.

Ruffer (LSE:RICA), the multi-asset investment trust, made its first foray into bitcoin-related investments in November, but quickly sold around six months later after making a profit of around $1.1 billion (£775 million).

At the time of the investment, the managers of the trust, Hamish Baillie and Duncan MacInnes, argued that the cryptocurrency has very low correlation with other asset classes and therefore offered a “small but potent insurance policy”.

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Tesla (NASDAQ:TSLA), which recently suspended vehicle purchases using bitcoin due to climate change concerns, is another holding that has attracted plenty of headlines for Scottish Mortgage due to the trust reducing its stake in Elon Musk’s electric vehicle firm. It has sold 80% of its holding.

Slater pointed out there were two key reasons as to why Tesla, which the trust first purchased in 2013, no longer has such an influential position. Last summer Tesla comprised 13.4% of Scottish Mortgage, but is now a 4.5% weighting.

Slater notes following Tesla’s strong share price rise (it was up over 700% in 2020) selling “a significant number of shares we owned was partly a function of having appropriate diversification.”

The second factor at play, Slater notes was questioning “how can we make five times our money from here from that start point. That drove some further reductions.”

Scottish Mortgage, one of interactive investor's Super 60 funds, focuses on disruptive companies that have a technological edge over competitors. Last month the trust reported its strongest ever yearly return in its 112-year history in the 12-month period to end of March.

It posted a net asset value (NAV) total return of 111.2% and a share price rise of 99%. In contrast, its benchmark – the FTSE All World Index – returned 39.6%.

Scottish Mortgage’s returns comfortably outpaced competitors. The sector average for global trusts over the same time period was 76.8% and 72.2% for NAV and share price returns.