Scottish Mortgage writes down unquoted holdings

The trust’s unquoted holdings are normally valued over a three-month rolling period, with an additional twice yearly in-depth review taking place. But ad hoc valuations can be carried out if a “trigger event” occurs that might materially affect the price Baillie Gifford could obtain in the market for stakes in these companies.

Baillie Gifford did not specify which of Scottish Mortgage Investment Trust's holdings had been affected or outline the full extent of the writedowns. But the company said that unquoted assets continue to represent “roughly the same proportion of the overall portfolio” as they did before markets began to sell off. At the end of February, just after markets had started to sell off heavily, 45 of the trust’s 88 holdings were unquoted, with the former representing 20 per cent of assets. The trust had assets worth £9.65bn at the end of February.

Although the update suggests that the trust’s unquoted holdings have taken a hit, any markdown alleviates the risk that they make up a disproportionately large part of the trust's assets after the severe falls in public markets. Up to 25 per cent of the trust’s assets, as measured at the time of investment, can be allocated to unquoted companies.

“We have had multiple ad hoc pricing reviews through the recent turbulent period,” said Baillie Gifford. “As a result, the unlisted assets continue to represent roughly the same proportion of the overall portfolio as they did before the impact of Covid-19 on global stock markets. While we appreciate that it may be of rather cold comfort for our shareholders through such challenging times, this robust policy does help to ensure that the published net asset values (NAVs) for Scottish Mortgage remain reflective of the current fair values of all the assets in the portfolio.”

Priyesh Parmar, associate, investment companies research at broker Numis, suggested that the revaluations could prevent any major dislocation between the trust’s share price and NAV.

“It is clearly disappointing that the statement implies there have been writedowns to unquoteds, reflecting the recent market volatility, but it makes sense to update valuations and means that investors do not need to apply a discount to the NAV,” he said.

Though not immune to the market volatility of recent months, Scottish Mortgage Investment Trust has held up extremely well this year. Between the start of the year and 14 April it made a NAV total return of 5.8 per cent and share price total return of 8.2 per cent. By contrast, the trust’s benchmark, FTSE All World index, fell by 10.8 per cent.

The global equity trust’s performance has benefited from its focus on disruptive, high-growth tech companies, some of which are enjoying heightened demand for their services in the coronavirus lockdown.

These include e-commerce names Amazon (US:AMZN) and Alibaba (US:BABA) and Tencent (HK:700), and entertainment provider Netflix (US:NFLX). Baillie Gifford said the trust had also benefited from holding companies that focus on areas such as food delivery, financial services, remote working and healthcare.

Scottish Mortgage Investment Trust is not the only fund whose unquoted holdings have taken a hit amid recent market volatility. Just a few weeks ago, Invesco wrote down the value of unquoted holdings in equity income manager Mark Barnett’s biggest funds, Invesco Income (GB00BJ04HX60) and Invesco High Income (GB00BJ04HQ93), by 60 per cent.

Scottish Mortgage Investment Trust's shares traded at a 2.5 per cent premium to NAV on 14 April.