Scottish Mortgage Investment Trust underperformed the market by a considerable margin in its first half but declared its longer-term performance “remains good”.

The £12.5 billion trust, managed by Edinburgh investment partnership Baillie Gifford, recorded a 2.7% fall in net asset value per share (NAV) on a total return basis in the six months to September 30. The FTSE All-World Index achieved a rise in net asset value of 4.3% on the same basis.

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Baillie Gifford partner Tom Slater, manager of Scottish Mortgage, said: “We will have periods when we underperform the market, and the six months in question was one. The longer-term performance record remains good.”

Shares in Scottish Mortgage closed 11.8p lower at 676p yesterday. They traded above 1500p in the autumn of 2021.

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Mr Slater noted the trust’s NAV had over five years gained 59.6%, compared with a 49.6% rise for the FTSE All-World. Over 10 years, the trust’s NAV had increased by 358.1%, compared with a 189.5% gain for the index.

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The trust declared an unchanged interim dividend of 1.6p a share.

Analysing the market’s performance during the six months to September, Mr Slater said: “Divining much that is useful from stock markets over a six-month period is challenging. The market's positive return has been driven by a handful of large technology companies that would seem to be the early beneficiaries of developments in artificial intelligence.”

He added: “The capabilities of today's AI systems are sufficient for widespread commercial deployment. Their ability to communicate in natural language based on an 'understanding' of the relevant concepts lends itself to many different use cases. Building a foundational AI model can cost billions of dollars, so only those with the deepest pockets can compete. Giant consumer technology companies have those resources and vast user bases to whom they can deploy the resulting applications.”

Mr Slater noted Scottish Mortgage’s objective is “to find companies with the potential for exceptional growth and then own them patiently as they deliver”.

He added: “There are times when stock markets reward this approach and times, as now, when they do not. We constantly revisit the case for our investments and expect that we will sometimes find our optimism misplaced.

“However, we do not revisit the underlying investment philosophy that has served us well for many years. The value created by the innovation and dedication of exceptional companies will deliver returns for our fellow shareholders. In turn, Scottish Mortgage's patient ownership and support can increase the likelihood of entrepreneurial success.”

Mr Slater said that chipmaker NVIDIA, shares in which Scottish Mortgage bought in 2016, had been “the key provider of the necessary computing infrastructure for AI”.

He added: “The acceleration in its business has been breathtaking. Revenue guidance for the third quarter is $16bn, which compares to less than $6bn a year ago. The step change that we have seen in AI's capabilities would have been impossible without NVIDIA's silicon. The pace of progress has exceeded our expectations and has been well ahead of what Moore's Law would have dictated for traditional computing.”

Mr Slater noted that “progress is being made across a broad swathe of technologies”.

He said: “What makes this so exciting for growth investors is that the number of ways companies can combine these technologies grows exponentially. Accelerated computing drives artificial intelligence, which can be applied to vast datasets in the cloud, enabling breakthroughs in healthcare and so on.

“Our companies are fitter for the future, and the opportunity they address grows at an accelerating pace. Economic news is usually dreary, and geopolitics rarely reassuring, but entrepreneurs' collective creativity and productivity are a source of great confidence and optimism.”

Mr Slater declared that Scottish Mortgage’s portfolio of growth investments is in “robust health”, and observed that “financial conditions have pushed companies to focus and prioritise profitable growth”.

He added: “We do not claim to be able to predict macroeconomic developments and are often bemused by the level of coverage given to the future course of interest rates. We can, though, observe the changes we have seen at the companies we own.

“Unable to assume that markets will provide capital, they are generating their own supply. They are trimming costs and focusing on the most promising projects. We are encouraged that they continue to spend heavily on research and development but believe a higher cost of capital introduces a healthy dose of prioritisation.”