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It could be time to buy back into Scottish Mortgage

It could be time to buy back into Scottish Mortgage
March 30, 2023
It could be time to buy back into Scottish Mortgage

When you hit rock bottom, the only way to go is up – at least in theory. But in the case of Scottish Mortgage Investment Trust (SMT), it is still unclear which way its share price is headed at present.

The trust has had a rough couple of weeks following a rough year. Earlier this month, Amar Bhidé, a director who has left the trust's board, told the Financial Times that he had clashed with the chair of the board, Fiona McBain, over the process to appoint two new board members, as well as his assessment of the risks posed by the trust’s unquoted investments. Since then, Bhidé says that he has reported his concerns to the Financial Conduct Authority.

Over the month to 28 March, Scottish Mortgage Investment Trust’s share price fell 9.9 per cent and its discount to net asset value (NAV) widened to 21.2 per cent, in contrast to the one-year average of 10.1 per cent.

This is the cheapest the trust has been in a long time. On 27 March, the Financial Times reported that hedge funds have started closing their short positions against it, a sign that they think its share price might be nearing the bottom.

This could present an opportunity for patient investors who are comfortable with high levels of risk. But the trust still faces significant headwinds that might take a while to go away. As at 28 February, 29.9 per cent of the trust's portfolio was invested in unquoted companies, close to its 30 per cent limit on this kind of asset. Numis' head of investment companies research, Ewan Lovett-Turner, notes that although the limit is based on the percentage at the time of investment, and Scottish Mortgage Investment Trust does not have to sell holdings in unquoted companies if the value of its publicly-listed holdings drops, it does limit the scope for new investments in unquoted companies, which could result in the trust missing out on follow-on opportunities. 

If the value of the trust's unquoted assets declines further, its exposure to them would be likely to increase, exacerbating the situation and potentially scaring off investors even more. Meanwhile, Stifel analysts have criticised Scottish Mortgage Investment Trust's and Baillie Gifford US Growth Trust's (USA) manager, Baillie Gifford, for their poor levels of disclosure on unquoted company holdings. Stifel analysts say that it can be difficult to understand the valuation of a company if its position size changes. 

Mick Gilligan, head of managed portfolio services at Killik & Co, says that Scottish Mortgage Investment Trust is still more transparent and detailed than most trusts that invest in venture and growth capital. He argues that its NAV “is as reliable as you can get in the relatively opaque and uncertain world of venture capital and private equity”.

Bhidé also questioned the trust’s capabilities to monitor its illiquid investments. But unlike other venture capital investors, Scottish Mortgage Investment Trust tends to acquire minority positions in its companies rather than taking majority positions and getting heavily involved in their strategy. “It does not need to replicate the teams required at venture capital and private equity firms,” argues Lovett-Turner. 

The macroeconomic backdrop remains complicated for growth assets, although a light at the end of the tunnel might be approaching. “Whether this is the bottom or not [for Scottish Mortgage Investment Trust] depends on whether we have seen peak inflation and peak rates are in sight,” Gilligan says.

So he recommends a prudent approach. “Scottish Mortgage Investment Trust has survived many headwinds since it launched 114 years ago and I think it will survive this,” he says. “Investors should hold tight but size their positions accordingly.”