Scottish Mortgage: time to buy the country’s most popular trust?

With Baillie Gifford’s star investment trust trading on a small discount, we discuss whether you should take advantage and buy.

Whether you’ve been watching financial markets for years or you’re new to investing, you will very likely have heard of the mighty Scottish Mortgage (LSE:SMT) investment trust. The growth investment strategy, which is seemingly Gorilla-Glued to the top of our monthly list of the most-bought investment trusts, is currently trading on a discount to its net asset value of -2.1%, giving investors the opportunity to ‘buy low’.

But despite the temptation, should fledgling investors view this as an opportunity given multiple macroeconomic headwinds, which have been negatively impacting the short-term performance of Scottish Mortgage?

This month, in a wide-ranging discussion with Scottish Mortgage fund managers called ‘Investing for the future’, in-house investment specialist Stewart Heggie said that the 113-year-old trust is about “trying to identify the world’s most exceptional growth companies”. To many investors, this will sound enticing.

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However, like many of the funds and trusts run by Edinburgh-based asset manager Baillie Gifford, SMT has suffered amid the market rotation from growth to value stocks. The technology sell-off at the start of the year, as fears over inflation mounted and central banks hiked interest rates in response, dealt the trust a heavy blow because of SMT’s weighting to growth and tech companies.

Now, Russia’s war in Ukraine has raised the prospect of even higher inflation, with the figure predicted to hit 8% in the UK in April. That’s not a great environment for growth shares, which are hit hardest when rates rise.

Can growth shares continue their run?

The one-year total return figure for Scottish Mortgage is -9.5%, while the three and five-year figures are 104.3% and 184.5%, respectively.

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Lawrence Burns, a partner at Baillie Gifford and deputy manager at Scottish Mortgage, told specialist publication Citywire in an interview in January that “even for very great companies, the path isn’t a straight line. Volatility is something that, if you want good long-term returns, you have to accept that the road’s going to be bumpy. For us, it’s about continuing to focus on what are the outcomes of these companies in five to 10 years’ time.”

Adventureland

A patient disposition is essential for investors in SMT. Any beginner contemplating buying the trust should be prepared to commit for the long haul and consider what is an appropriate allocation for them given their risk profile and investment objectives. SMT, which has an ongoing charge figure of 0.56%, appears on interactive investor’s Super 60 list of rated investments and is officially classified as an ‘adventurous’ option, so prepare for turbulence.

It is a high-conviction portfolio that typically holds around 100 companies – 102 at present – and the largest 30 holdings account for 73% of total assets. Another aspect pertinent to Scottish Mortgage’s risk profile is its exposure to private companies, which are much higher risk. At the time of writing, SMT was invested in 49 unlisted companies, accounting for 24.8% of total assets.

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Key man risk

Respected fund manager James Anderson, who has been at the helm of Scottish Mortgage since 2000, steps down from the trust at the end of next month. Yet this investment trust star will be leaving SMT in the hands of experienced co-manager Tom Slater and deputy Burns. interactive investor put the Super 60 trust under formal review when Anderson’s retirement was announced but chose to retain SMT in the rated list.

interactive investor’s collectives editor Kyle Caldwell said: “The succession plan has been in place for some time. Tom Slater, who has worked on Scottish Mortgage since 2009 and been co-manager since 2015, will run the trust with the support of deputy Lawrence Burns. The genuine team-based approach and the fact that Slater has managed the fund for several years should comfort investors. In my view, it is business as usual.”

From left: James Anderson, Tom Slater and Lawrence Burns

Russia’s war in Ukraine

Given the investment trust’s long-term vision, what do managers think about the situation in Ukraine? In the ‘Investing for the future’ seminar, Slater said that “there’s this constant evolution to talk about whatever the topic of the day is. Today it’s Ukraine, the week before last it was inflation. Before that it was the virus...And that is not our domain of expertise. And we ought to be humble on that front.”

Reflecting on the conflict in Ukraine, Slater clarified that “there’s little first-order relevance to the portfolio, exposure to Russia, etc. The challenge that arises from it is if Putin’s trying to tear up the existing world order, what does that mean for investments in China? What does that mean for the trend to globalisation that we’ve seen over the past couple of decades? We’ve got two internets at the moment; do we stop there? Or do we see it splintering further? So, it’s this gradual process of trying to think through the second-order impacts.”

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On China

China is home to a glut of tech companies promising - but crucially not able to guarantee - future growth. In addition, there is the threat of regulatory change and the state’s history of flexing its muscles by cracking down on sectors including tech and education.

When asked by Heggie how the portfolio’s Chinese holdings are navigating current regulatory changes, Burns says that “regulating technology is a global issue, not just a China issue. We see this in the EU with regulation around gig economy workers linked to some of the delivery platforms, which is following similar regulatory moves in China. We see it in the US, where the Department of Justice will challenge Google on various practices. What we’re seeing in China is therefore an answer to a global question that we’re struggling with everywhere: how do you interact as a society with these incredibly powerful technology platforms?”

Besides worries about Middle Kingdom tech firms, some investors have concerns over China that they cannot ignore, however tempted they might be to invest in Scottish Mortgage. interactive investor columnist Ian Cowie, for example, has chosen to divest his portfolio of all China investments because of the treatment of the Uighurs in the country.

Buying a slice of the future?

SMT’s portfolio, at first glance, has something of an Aladdin’s cave feel about it given that the trust is invested in well-known names including Elon Musk’s electric car firm Tesla (NASDAQ:TSLA), Chinese food delivery giant Meituan (SEHK:3690), which delivers 30 to 40 million meals a day (yes!), and e-commerce mega-caps such as Alibaba (NYSE:BABA) and Amazon (NASDAQ:AMZN).

Burns cites the example of Moderna (NASDAQ:MRNA), which isone of theportfolio’s top 10 holdings. The company, now a household name for its Covid-19 vaccine, has been negatively impacted by the market rotation away from growth and technology shares. Its share price has halved over the past six months – down 54%.

Scottish Mortgage remains a big fan, reflected by the fact that Moderna was its top holding at the end of February – accounting for 6.3% of its assets.

Burns says:“Nothing is ever certain in the future, but what else can [Moderna] do beyond Covid? That answer won’t be depending on inflation and interest rates…One of the attractors of Moderna is simply that it’s something that goes far beyond the Covid vaccine. They have about 40 programmes currently in development, and only 10 are Covid-related. They’ll have programmes around flu, HIV, Zika virus, cancer, cystic fibrosis, a huge range.”

Slater adds that “Moderna is effectively writing software code, it’s just that it’s not zeros and ones, it’s GTAs and Cs. It’s programming.” This intersection of biology and technology is undeniably fascinating, and Scottish Mortgage’s portfolio is bursting with innovative firms.

However, not all SMT’s top 10 holdings are household names such as Moderna. The trust’s holdings in unquoted firms include Nuro, which makes self-driving, zero-emission vehicles that deliver Domino’s pizzas in the US (pictured), among other things, and aerospace manufacturing firmRelativity Space.  

So while many of SMT’s holdings and the themes they offer investors exposure to are undoubtably exciting, there are several things worth doing before committing. This includes checking the sector weightings and regional exposure of SMT against your existing portfolio to make sure you avoid duplicating exposure to the US and/or tech. A full list of SMT’s holdings is available here.

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Caldwell feels that “the share price falls in recent months does make Scottish Mortgage more attractive, provided that investors are willing to take a long-term view and accept that this is an investment trust that gives investors a bumpy ride”.

He urges investors to remember that SMT is “adventurously invested, as it backs disruptive growth companies, both public and private. Some of these companies will prove to be successful investments, but others may fail to pay off.

“Over the years, Scottish Mortgage’s track record at identifying winners speaks for itself. For example, it first invested in Tesla in 2013. The trust also invested in Amazon and Alibaba at an early stage.”

To even out those bumps, investors may wish to set up regular investments rather than commit a lump sum to SMT. This strategy means you buy more shares when the price is lower, and fewer shares when the price is higher, but it does reduce risk in volatile markets.