Ian Cowie: the key questions facing Scottish Mortgage

Our columnist gives his take on recent events at the FTSE 100-listed investment trust, which has been subject to a boardroom spat.

The spectacular decline of Scottish Mortgage (LSE:SMT), which used to be Britain’s biggest investment trust before it lost half its value, raises important questions for shareholders and potential investors.

Why is Scottish Mortgage so much cheaper than it used to be? What is behind the boardroom row that has seen one director depart and unseated the chair? Most importantly, might it make sense to buy on this dip because fortune could favour the brave again?

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First, it is only fair to note SMT’s fabulous past performance and ‘fess up to one of the biggest mistakes this DIY investor ever made. More than a decade ago, its lead fund manager, James Anderson, told me about opportunities in China’s technology sector, long before I had heard anything about the maltreatment of the Uighurs, but I still failed to buy any SMT.

That meant I missed total returns of 338% over the past 10 years, according to independent statisticians Morningstar, which mean SMT still sits at the top of the Association of Investment Companies (AIC) ‘Global’ sector over that period.

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More recently and less happily, it returned 49% over five years - placing it fourth in this sector, behind Brunner (LSE:BUT), F&C Investment Trust (LSE:FCIT) and Martin Currie Global (LSE:MNP) - before losing an eye-watering 34% and plunging to the very bottom of the pile over the last year.

Rising inflation and interest rates are the fundamental reasons behind this dramatic reversal. Even at today’s depressed share price, SMT yields a barely visible 0.54% dividend income.

No wonder Mr Market has lost his taste for ‘jam tomorrow’ stories or growth stocks such as SMT’s top 10 underlying holdings, which include the American vaccine-maker Moderna (NASDAQ:MRNA); the Dutch semi-conductor chip-maker ASML (EURONEXT:ASML); and the Latin American online retailer MercadoLibre (NASDAQ:MELI).

Never mind generalities, the shocking specifics for shareholders are that SMT’s price has plunged from a peak of £14.84 in October 2021, to trade around £6.59 this week.

So perhaps it is no surprise to see the board of directors fall out and indulge in a bout of finger-pointing. This week Fiona McBain, who has been a director since 2009 and chair since 2017, announced she will leave after SMT’s next annual meeting. Earlier this month, Amar Bhidé, a non-executive director (NED), claimed he had been forced out after criticising SMT’s oversight of unlisted holdings that have exceeded 30% of its portfolio value.

It would be easy to mock the system of NEDs or Neddies as a form of outdoor relief for distressed former journalists and others with time on their hands. But independent oversight should protect investors’ interests in a way that is absent in unit trusts or open-ended investment companies (OEICs).

Some measure of NEDs’ success can be seen in this trust’s very low ongoing charge of 0.32%. Nobody can accuse managers Baillie Gifford of overcharging for access to its £13.26 billion global portfolio.

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However, SMT shareholders’ fortunes are unlikely to revive before interest rates decline and reduce the opportunity cost of holding assets that produce low or no income. Your view on fundamentally unknowable future rates may largely determine your view on SMT.

For me, it remains ruled out because even after recent reduced exposure to the People’s Republic of China (PRC), the country still represents 14% of this trust’s total assets. Top 10 holdings include the online retailer Meituan (SEHK:3690) and digital media group Tencent Holdings (SEHK:700). As discussed here before, the maltreatment of the Uighurs and rising tensions with the US means SMT raises more red flags than the PRC.

On a brighter note, fondly remembered Anderson’s departure from this trust last April looks like the best-timed retirement since Alex Ferguson left Manchester United Football Club. Both Scots are sorely missed by massed ranks of fans.

Whatever the rights and wrongs of SMT’s increasingly personal boardroom spat, it has disproved Michael Grade’s jibe about allegedly pointless NEDs’ lack of utility.

When Grade was chairman of ITV, he claimed: “NEDs are like bidets - you’re not sure what they are there for but they add a touch of class.”

Quite to the contrary, SMT’s former NED, Bhidé, has flushed out deep-seated worries about unlisted valuations and focused attention on matters some might prefer to ignore.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.