Scottish Mortgage hits record discount as fear takes over markets

The giant growth investment trust’s share price has collapsed as investors weigh up rising inflation and interest rates.

Rock-bottom sentiment in financial markets means shares in Scottish Mortgage (LSE:SMT) investment trust are currently trading at a near-record discount to the value of their underlying investments.

Last week, the discount hit a record 18.3%, before falling to around 17% today after the share price jumped 2%, although those gains were handed back in the afternoon session. 

This surpasses the 16.9% reached in October 2008, in the depths of the great financial crisis, according to Morningstar data. The trust has an average premium of 0.69% over the past 12 months and an average discount of 2.9% since 2008.

Investors are dumping fast-growing stocks as they weigh up rising interest rates. A higher risk-free rate means that future profits are less desirable, leading to the most speculative stocks, such as those Scottish Mortgage owns, being hit the hardest.

Consequently, shares in Scottish Mortgage have halved in value since November. The crash in their value comes as investor confidence plummets globally.

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Bank of America’s monthly fund manager survey of investors found that Wall Street sentiment was “dire”, with global growth optimism at an all-time low and fears of stagflation (high inflation and low growth) at their greatest level since June 2008.

Its “bull & bear” indicator, which measures investor sentiment, is signalling extreme bearishness, with a score of zero.

It has only hit this level in August 2002, July 2008, September 2011, September 2015, January 2016 and March 2020.

Such a level is actually a signal to buy shares, according to Bank of America, as all the pessimism is baked into share prices and a rebound could be due.

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Dzmitry Lipski, head of funds research at interactive investor, reckons the low Scottish Mortgage share price relative to net asset value makes it a bargain.

The trust is part of interactive investor’s Super 60 list of recommended funds as an “adventurous” option, making it a good satellite holding in a well-diversified portfolio, thinks Lipski.

He said: “The current share price is a bargain, given how wide the discount is compared with its history. Wide discounts tend not to last long, so investors ready to commit to a long holding period could use this as a good entry point into one of Britain’s most prominent investment trusts.”

He adds that Scottish Mortgage is well positioned to grow the capital of patient investors as its managers' expertise, and their commitment to work with academia, should allow them to find modern portfolio ideas in both private and public markets. 

“The strength of their stock-picking skills combined with strong risk-adjusted performance and competitive fees make this a good choice for long-term investors,” said Lipski.