Is it time to take some profits in Scottish Mortgage?

The trust’s share price has almost doubled from a low of 468p on 18 March after strong performance from some of its tech holdings. 

Now could be a good time to bank some gains from the Scottish Mortgage (LSE:SMT) after an “exceptional” 55% share price rise since the start of the year, says investment trust analyst firm Stifel.

In a note to clients last week (19 August), Stifel’s analysts said the £13.5 billion trust has recorded both strong long- and short-term share price and net asset value (NAV) performance, with its share price almost doubling from a low of 468p on 18 March.

This has been driven by the performance of some of the top 10 holdings including Tesla (NASDAQ:TSLA), which has experienced a stratospheric rise in its share price of 377% year-to-date. Amazon (NASDAQ:AMZN), Tencent (SEHK:700) and Alibaba (NYSE:BABA) have also proved strong contributors to the trust’s performance. The managers have been trimming exposure to some of their larger positions as share prices have soared. 

Concentration risk

Stifel notes that concentration in the portfolio is high, with the 10 largest holdings accounting for 58% of NAV as at 30 June. This has benefited investors so far but could quickly turn to a risk. The analysts say: “In recent months, this concentration has worked well for shareholders given the very strong price performance of many of the trust’s largest investments. However, in a different market scenario, or if there were some negative company-specific issues, the concentration could be an important risk factor, potentially impacting performance.” 

The analysts argue that taking some profits now could be a “contrarian but prudent” move for shareholders.   

“Given the exceptional performance…since the start of this year….we do think there is a good case to take some profits and lock in some gains,” the note said.

“Experience suggests to us that trust NAVs and share prices don’t rise in a straight line indefinitely. What none of us knows is what the catalyst will be for a change in market conditions.”

Stifel suggested that such a catalyst could conceivably be a rotation from growth to value stocks. Value funds have recently begun to make a comeback, although it is impossible to tell whether the rebound will have longevity. Another could be if the market starts to think valuations of technology and growth stocks look overstretched, or if US policies on tech companies change if there is a new administration following November’s US presidential elections. 

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Staggering returns

Scottish Mortgage is one of interactive investor’s Super 60 fund picks. Teodor Dilov, fund analyst at interactive investor, says the trust’s reputation was founded on solid stock-picking.

He says: “We rate Scottish Mortgage trust as an adventurous option, and although it delivered staggering returns over both short- and long-term, tempting investors to increase their stake in the trust, that would bring too much risk and may be inconsistent with an individual’s risk profile. 

“Its incredible track record was built on exceptional stock selection and preference for innovative and disruptive businesses. However, that comes at the price of increased volatility, and this strategy could be best utilised as a satellite-growth engine within a well-diversified portfolio.”  

But, Dilov agrees that now could be an opportune time to take some profits. 

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“Taking profits now could be reasonable for those who have had larger exposure to the trust, but for those who hold it within reasonable limits it would hardly make any difference as the trust still remains a high-quality diversifier,” says Dilov. 

Scottish Mortgage is currently trading on a small discount to NAV of -1.7%, according to data from Winterflood. 

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.