Scottish Mortgage doubles private company investment in two months

After revealing to Investors Chronicle just two months ago that under 5 per cent of its assets were invested in unlisted stocks, the fund has doubled its exposure to private companies to 10 per cent.

According to its interim report, the trust is now invested in 16 unquoted holdings, which include data analytics company Palantir Technologies, at 1.1 per cent of the trust's total assets, and Indian e-commerce company Flipkart. The report said shareholders should expect the volume of assets invested in unquoted stocks to increase.

The trust's managers, Tom Slater and James Anderson, think some of the best new names in technology - a key theme within the portfolio - are housed in the private sector. They say the technology-flavoured businesses they favour do not require much capital and can afford to stay out of the public markets for longer, despite being in other ways well-developed companies. The report states: "These are not immature venture capital style businesses, but established, often highly cash-generative companies."

But there are risks involved in unlisted stocks. Some commentators point to the mushrooming population of private tech stocks valued at over $1bn - which Mr Anderson and Mr Slater like - as evidence of a dangerous bubble. The trust values its holding in Palantir at £39.9m and its Flipkart stake is estimated at £33.95m.

Over five years Scottish Mortgage has trounced the returns of its index, returning 117.3 per cent compared to 52.9 per cent for the FTSE All-World. In six months the trust's share price fell by 9.7 per cent, less than the benchmark, which dropped 11.8 per cent.

Scottish Mortgage is one of the many trusts and funds which invest in unlisted stocks in the belief that some of the best opportunities come up outside public markets. Renowned fund manager Neil Woodford invests in them across his CF Woodford Equity Income (GB00BLRZQC88) and Woodford Patient Capital Trust (WPCT), but chooses earlier-stage companies to back. He has championed unlisted and early-stage stocks, arguing that they are a source of enormous and undervalued potential.

Mr Woodford holds 21 unlisted stocks in Woodford Patient Capital Trust, a new fund aimed at small and fast-growing companies. The majority of those are healthcare companies such as Oxford Nanopore, which is developing the next generation of DNA sequencing technology. Others include clinical-stage biotechnology company Immunocore, which researches and develops cancer treatments.

Unlike Scottish Mortgage's portfolio, the majority of early-stage, private businesses Mr Woodford chooses do not yet have earnings streams and have major hurdles to overcome before fulfilling their potential. That means they often carry high risks and low valuations, but can deliver very high returns if they succeed.

Scottish Mortgage's unlisted holdings tend to be in some way technology-focused and include assets such as online travel company Airbnb, peer-to-peer lending service FundingCircle, and online directory service Thumbtack.

Caledonia Investments (CLDN) also invests in unquoted stocks and now has 34 per cent of its assets in the private sector, including its largest holding, caravan park operator Park Holidays, valued at £113.4m. Investment company Cobehold and residential club the Sloane Club also appear in its top 10 holdings.

Full list of unquoted holdings in Scottish Mortgage Investment Trust

Source: Baillie Gifford, all at 31 July 2015 apart from asterixed assets, as at 30 September 2015

Top 10 unquoted holdings in Woodford Patient Capital Trust

Source: Woodford Investment Management, as at 30 September 2015