While the FTSE 100 has a stuffy image of mature blue-chips and dinosaur stocks, there are ways to get exposure to exciting up and coming companies too. Investment funds offer one approach to do this.
Footsie fund Scottish Mortgage Investment Trust (LSE: SMT) aims to invest in the best and brightest new companies globally. In a statement issued in June, it boasted that it invested in half of the world’s top 10 most valuable ‘unicorns’. What are unicorns in this context? Which companies do they include? Is the stock a good buy today? Let’s answer those questions.
Unicorns
The word ‘unicorn’ refers to a private company worth $1bn or more. The phrase gained traction in US venture capital circles. Many of today’s biggest companies (and also most rewarding buys for investors) started as unicorns, including Uber, Facebook (now Meta) and Airbnb. The word ‘unicorn’ was chosen as these companies, just like the mythical creatures they’re named after, are vanishingly rare.
So what are the unicorns? The first is SpaceX, the $350bn (in estimated market cap) fimr that’s eating NASA’s lunch. The private company is completely dominant in the growing space economy, delivering over 80% of global payload mass to space in recent years. It was first added to the fund in December 2018 when it was valued at $31bn.
The second most valuable unicorn is $300bn ByteDance. The Chinese company will be more known for its social media app TikTok. It was added to Scottish Mortgage in May 2019 when it was valued at $75bn.
Two more in the top 10 are payment processor Stripe and analytics firm Databricks. Both firms have roughly doubled since being added to the fund. The smallest holding in the top 10 is British fintech Revolut, which was only bought in February this year. As such, it hasn’t had much of a chance to lock in growth yet.
Drawbacks
While all this talk of up and coming firms is exciting, it’s worth pointing out the drawbacks. For one, all those valuations are estimated. These are private companies that aren’t listed on exchanges. Some analysts have already said Scottish Mortgage might be overvaluing some of its holdings.
Secondly, this is a very concentrated portfolio. These are high-growth firms whose value comes more from future earnings rather than current operations. That can pose problems if they don’t grow as expected.
It’s also worth bearing in mind that the fund has a maximum of 30% unlisted companies. The majority of the portfolio comprises companies that any investor can buy a stake in anyway.
With all that said, there’s a lot of promise here if these unicorns make good on their prospects. I’d definitely call Scottish Mortgage Investment Trust one to consider.
