Scottish Mortgage suffers due to brutal tech sell-off...

...but Britain’s former largest investment trust can still reward patient long-term investors, says interactive investor.

• Scottish Mortgage Investment Trust is no longer Britain’s largest investment trust in market-cap terms after a brutal crash in the value of technology stocks
• Private equity investor 3i Group displaces SMT as Britain’s largest investment trust

Investor nervousness about the prospect of spiralling inflation and the inevitable interest rate hikes that follow has hit technology stocks hard, and popular investment trust Scottish Mortgage (LSE:SMT)hasalso suffered as a result. This crash comes as a stark contrast to the consistent growth delivered by the trust over many years, which will understandably be making many holders of the trust concerned about next steps.

Today, interactive investor, the UK’s second-largest platform for private investors, takes a look at how investors should be approaching this.

The trust’s share price has dropped nearly 50% from a high of around £15 in November 2021 to £7.80 as of 10 May 2021, according to the London Stock Exchange.

Its market capitalisation (which is calculated by multiplying the share price by the number of shares) now sits at £11.2 billion, according to the London Stock Exchange.

This is below the £12 billion value of private equity investor 3i (LSE:III), which has now become Britain’s largest investment trust in market cap terms. Looking at a company by its market cap tells you more in terms of its relative size compared to that of other companies. Total assets, however, details the total value of assets held, including gearing.

It is worth noting, however, that Scottish Mortgage Trust is higher than 3i Group in terms of total assets.

Scottish Mortgage's total assets are worth £14 billion compared with £13 billion for 3i Group, according to the latest data from financial data firm Morningstar.

Dzmitry Lipski, Head of Funds Research, interactive investor, explains: “Scottish Mortgage Investment Trust provides global exposure to disruptive growth companies, public and private, selected by highly experienced managers. The strength of their stock-picking skills combined with strong risk-adjusted performance and competitive fees make this a good choice for adventurous long-term investors.

“Investors should note, however, that it is higher-risk investment due to its high portfolio concentration, exposure to unquoted companies and tech stocks. The risks of all this is enhanced further by gearing (borrowing), so it works better as a satellite holding in a well-diversified portfolio.

“The style bias of the trust is toward growth, with less attention paid to valuation, meaning it can complement other funds with a core or value style orientation.” 

What does the sell-off mean for the future of Scottish Mortgage?

As Dzmitry Lipski explains: “Despite the recent sell off, or as long-term investors would say, ‘short term volatility’, it is still well positioned to grow and reward patient investors over the longer term. The size of assets should continue to provide easier access to more opportunities in both public and private markets and the managers expertise and their commitment to work with academia should allow them to find modern portfolio ideas and maintain a competitive edge against other players. 

“Support and access to wider resources from Baillie Gifford are also important, especially in such challenging times.”

Sam Benstead, Deputy Collectives Editor, interactive investor, adds: “Expectations for higher interest rates to fight inflation have caused investors to sell bonds, pushing the yield on 10-year US government debt to around 3%. It is worth remembering that the yield was as low as 0.55% in the summer of 2020.

“Higher returns on offer from safe investments, such as government bonds, leads to lower valuations for companies that promise profits way out into the future, such as those that Scottish Mortgage invests in.”

A bargain opportunity for investors?

Lipski adds: “The trust is currently trading at discounts relative their NAVs and below their 12 months average. Z-statistics over 1 and 3 years are negative and therefore confirm that the trust is cheap relative to their mean. Z- statistics shows the number of standard deviations the current discount is from the historical mean discount.

“In general, trusts have a greater tendency to converge to their mean discount than to actual NAV.”

Scottish Mortgage is a member of interactive investor’s Super 60 list of recommended funds.