The latest bout of global market turmoil is turning the focus on Scottish Mortgage Investment Trust. Despite its solid-sounding name, the popular investment trust is brimful with high-risk tech stocks.
Shares in the 113-year-old £15billion trust, a member of the FTSE 100, have tumbled by a third since November.
The descent has been driven by fears that rising interest rates will deprive tech of its appeal.
Tech stocks have soared recently because central banks cut interest rates and pumped money into economies in the pandemic.
This prompted investors to seek better returns from companies such as Amazon, Netflix and Zoom, which also benefited from changes to behaviour in the coronavirus lockdowns.
Rock-bottom borrowing costs and the flood of money have meant funding has been easy to come by, even for risky tech outfits.
The worry is that this is going into reverse – and it is sparking questions about the outlook for Scottish Mortgage, a trust that is a gamble on every form of innovation from biotech to TikTok, and a favourite among investors of every age (of whom I am one).
James Anderson, one of the trust’s trio of managers, believes that stock picking must be bold and radical. Scottish Mortgage now stands at a 7 per cent discount to the value of its net assets, an unusual occurrence. So is this the moment to sell out – or an opportunity to snap up some shares?
Scottish Mortgage is a way to invest in companies like Tesla and Joby Aviation, a flying taxi business. SpaceX and Epic Games are among the trust’s unlisted holdings, which make up 20 per cent of the portfolio. The fear is that this may be the end of the glory days of Scottish Mortgage, the star in Baillie Gifford’s array of funds.
The trust has far outperformed its competitors in the global category, returning 143 per cent, 214 per cent and 757 per cent, over three, five and 10 years. But, as Anderson exits from Baillie Gifford to join Kinnevik, a Swedish fund, it seems that markets could be shunning growth stocks like Scottish Mortgage in favour of value.
Buying growth stocks, even at elevated prices, has until recently been seen as a sure-fire way to gains. Value stocks are deemed to be trading at prices below their intrinsic worth. Against this backdrop, it is clearer than ever that Scottish Mortgage has always only been suitable for those with strong nerves – a fact which may have been forgotten during the recent boom.
As Mick Gilligan of Killik & Co points out: ‘Scottish Mortgage shares dropped by 50 per cent during the bursting of the dot-com bubble and the financial crisis.’ He adds: ‘The trust owns shares in world-class businesses. But if you bought the shares with a short-term view, say, under five years, you should not be holding it.’
Anderson and his fellow managers Tom Slater and Lawrence Burns operate on the principle that 4 per cent of stocks account for all net wealth creation.
When they decide on such a stock, their commitment is not shaken by ‘periods of difficulty, market doubt or outright hostility’, as they said this week.
Exit: Fund star James Anderson
The trio cite the example of one key constituent of the portfolio: ‘Amazon was bought in 2005 and inside a year it fell by a third when it launched Amazon Prime. After recovering, it then halved in value during the global financial crisis. These periods require us to be resolutely long term through both good times and bad.’
In 2005, Amazon shares were $40, today they are $2,793. The managers say that they will not be diverted from their course: ‘As the oddities of the pandemic fade and anxiety levels have risen, several investors have been taking profits, but there are also wonderful buying opportunities for those whose time horizons reach far beyond the stuttering conclusion to the pandemic. Success requires patience and we promise to be patient.’
Lee Wild of Interactive Investor points out that younger people, the group most able to be patient and audacious, should be considering Scottish Mortgage, if only because it provides access to unlisted holdings.
Many regard these stakes as the most imperilled part of the portfolio. The Scottish Mortgage managers contend, however, that these companies can be the most lucrative wagers if they go public.
They point to biotech group Ginkgo Bioworks which is ‘at the centre of a new industrial revolution’ and Northvolt, which makes lithium-ion batteries for electric vehicles. Iain Scouller of Stifel contends that the unlisted part of the portfolio could provide ‘ballast’ amid market fluctuations.
He suggests drip-feeding cash into the trust, a safety-first approach I adopted when I embarked on my Scottish Mortgage adventure.
I am not abandoning this foray into innovation, but am building up buffers against further shocks
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