The Scottish Mortgage Investment Trust made some of the industry’s biggest returns by investing in high-growth assets over the past decade, yet volatile market conditions have halved its share price from its peak in November 2021.
It is the best performing trust in the IT Global sector over the past 10 years, climbing 357%, whilst also beating all but one (Morgan Stanley Global Opportunity) of the 229 funds in the open-ended IA Global peer group.
Scottish Mortgage certainly delivered over the long term, but its 55% drop in share price from its peak over the past 19 months may leave investors confused – is now an opportune moment to buy a strong trust at a large discount, or time to sell out before it drops further?
Total return of trust vs benchmark and sector over 10yrs
Source: FE Analytics
Although it was a “painful” holding for shareholders in recent years, Ewan Lovett-Turner, director at Numis, said that it still deserves a place in investors’ portfolios.
He said Tom Slater and Lawrence Burns’ all-out-growth approach to investing “stands apart from almost all other” strategies, making its current discount of 19% particularly favourable for investors with long-enough time horizons.
“Whilst this [investment approach] may be uncomfortable in times of stress we believe this can deliver an attractive return over the long term,” Lovett-Turner said. “We believe the discount offers value and is more likely to be a tailwind returns over the medium term.”
Indeed, QuotedData head of investment company research James Carthew agreed that the discount has become “too wide,” although this is because its 29.9% allocation to private equity has become too excessive.
“It likely reflects uncertainty in investors’ minds over the value of its unlisted investments, which are too large a proportion of its portfolio,” he added.
Private and public company holdings in trust
Source: Baillie Gifford
Some shareholders were spooked in March when non-executive director Amar Bhidé left the board after disagreements over the size of the trust’s exposure to unlisted companies.
While the board has attempted to address these concerns, Carthew said Scottish Mortgage’s rough patch is unlikely to stop soon.
He said investors who want to take advantage of Scottish Mortgage’s sizable discount should buy shares incrementally as its share price could remain volatile.
“Drip money into the stock over time and be prepared to take advantage of any renewed sell-off,” he said. “Don’t make too big a bet on it as it will continue to be volatile – high gearing doesn’t help in that regard.”
However much investors choose to put into the trust, Winterflood equity research analyst Shavar Halberstad said he “certainly considers the current discount an attractive entry point”.
Rather than viewing Scottish Mortgage’s private equity allocation as a negative, Halberstad said it gives investors exposure to exciting companies such as SpaceX and TikTok that they wouldn’t otherwise have access to.
Those who are still worried may be reassured to hear that two of its unlisted companies – Stripe and Starlink – could potentially go public soon, which would crystalise the trust’s gains and reduce private equity exposure, according to Halberstad.
“The portfolio continues to include some of the world’s most successful growth businesses, which may well be attractive for investors with particularly long-term investment horizon, significant risk appetite and a desire for unquoted exposure,” he added.
Scottish Mortgage’s private equity exposure may have been in the spotlight lately, but FundCalibre managing director Darius McDermott said that people were making “unfair comparisons” to the Woodford scandal.
Neil Woodford had his fund frozen in 2019 after a large number of investors asked for their money back at once – a request he couldn’t fulfil because too much of the fund’s capital was tied up in illiquid assets.
However, McDermott pointed out that Woodford’s fund was open-ended, whereas the structure of investment trusts makes them more safer for investing in private equity.
“It is the correct structure for illiquid stocks as it does not force the managers to sell companies if they are getting redemptions, but simply see the trust go to a discount,” he said. “I’d also point out that the companies held by Scottish Mortgage are significantly larger in size.”
Although shareholders “would’ve been disappointed” with recent performance, McDermott said fears over private equity exposure were overhyped and its inflated discount could open the opportunity to buy a trust with a strong track record at a cheap price.
Nevertheless, CT Managed Portfolio Trust manager Peter Hewitt has not yet taken advantage of Scottish Mortgage’s depressed value and rebuilt his exposure there.
It was his third biggest position last year but he slashed it down to the 33rd spot as its growth bias swung out of favour.
Hewitt did the same to other high-growth trusts, some of which he has begun reallocating to as the rise of artificial intelligence (AI) improves the outlook for technology.
This year, he bolstered exposure to the Polar Capital Technology and Allianz Technology trusts (which are on discounts of 13.8% and 11.8% respectively) to get exposure to this theme – something that is lacking in Scottish Mortgage.
“SpaceX and Stripe are big holdings for them and these will all be successful businesses, but they're not benefiting from what's going on with AI,” Hewitt explained. “Most of them there are generating revenues but not profits and in the current environment, markets don't like that.”
With large discounts available across the market, Hewitt said there are more appealing trusts to nab at a low price.