Baillie Gifford’s Scottish Mortgage cuts China exposure

Baillie Gifford’s Scottish Mortgage Investment Trust, one of the biggest China bulls in recent years, has slashed its exposure there, including longstanding investments in tech giants Alibaba and Tencent.

The £14.2bn FTSE 100-listed investment trust said in its half-year report on Friday: “The regulatory environment in China remains challenging, and we are concerned that ongoing uncertainty will harm the risk-tolerant culture that has driven the long-term success of China’s private sector.”

The UK’s largest investment trust added to its China holdings last year and former co-manager James Anderson said that China was an even more compelling source of tech opportunities than Silicon Valley. He retired this year and was replaced by his co-manager Tom Slater, and deputy manager Lawrence Burns.

A number of foreign investors are weighing up their exposure to China given President Xi Jinping’s increasing grip on power, disappointing economic data and waning hopes of a rapid relaxation of tough Covid-19 rules.

Scottish Mortgage’s shares are down 37 per cent this year, reflecting a global sell-off in tech stocks. Around a third of its portfolio is in private companies, which it says it has marked down by an average of 17.8 per cent in the six months to September 30.

Slater warned in May that the war in Ukraine was a factor that had worsened US-China relations and that foreign investors needed to be mindful of limits Beijing might impose on investment gains, but he also said that the trust’s China holdings remained “largely unchanged” this year.

Baillie Gifford invested in Alibaba in 2012, when the company was still private. It was the £228bn Edinburgh-based asset manager’s first investment in an unlisted company. It also bought stakes in Chinese food delivery app Meituan and TikTok owner ByteDance when they were still private companies.

As of September 30, Alibaba accounted for 0.9 per cent of the portfolio, down from 2.5 per cent at March 31, and Tencent for 2.8 per cent, down from 4.2 per cent. It currently has a 3.4 per cent holding in Meituan and a 2.5 per cent stake in ByteDance.

Peter Singlehurst, head of private companies at Baillie Gifford, told the Financial Times Future of Asset Management event in London this week that the firm is “not ready to walk away from China at all” and would continue to seek out “those handful of exceptional companies” in the country.

However, he said that “the more pressing question for us in China is will the best Chinese businesses continue to raise capital from foreign investors?” 

Historically Chinese companies favoured by foreign investors — the likes of Alibaba, Meituan and ByteDance — have raised capital in US dollars, which meant foreign investors have been able to invest. “If the next generation of companies were to start raising capital in renminbi, that would make it much more difficult for foreign investors to be able to access the best companies,” Singlehurst said.

Scottish Mortgage said on Friday it had increased its stake in European battery producer Northvolt, which is now the trust’s fifth-largest holding “This private European battery producer is looking increasingly well-placed to supply the rapidly growing demand for electric vehicles.”