Top-10 Scottish Mortgage stock plunges 30%

A top-10 position in Scottish Mortgage, the growth-focused investment trust from Baillie Gifford, crashed 29% on Bank Holiday Monday.

PDD Holdings Inc ADR (NASDAQ:PDD), the Chinese internet shopping company which owns Pinduoduo and Temu, issued a warning to investors that there would be an “inevitable” decline in profitability.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

As of 31 July 2024, PDD was a 3.5% position in Scottish Mortgage. SMT shares dropped 2% today, linked to its large PDD positions and broader negative sentiment towards technology stocks.

Shares in the Chinese company, which have a US listing, are now down more than 30% so far in 2024, but have risen 24% over the past 12 months.

In its latest results, for the second quarter of 2024, PDD reported an 86% increase in revenues year over year, and a 156% increase in operating profits – all in local Chinese currency. However, while revenues rose, they missed market estimates.

The strong results were accompanied by negative remarks from Jiazhen Zhao, co-chief executive of the group.

He said: “While encouraged by the solid progress we made in the past few quarters, we see many challenges ahead.”

Jun Liu, vice-president of finance, added: “In the past quarter, our revenue growth rate slowed quarter-on-quarter. Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges. Profitability will also likely be impacted as we continue to invest resolutely.”

• Funds light on ‘Magnificent Seven’ that have delivered top returns
• Is inflation beaten? The impact on stocks and bonds explained
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Scottish Mortgage owns a large portfolio of companies that it believes offer enormous growth potential.

But investing in such a way can be very volatile, with top stocks often registering big moves in either direction. Winners over the long run, with lots of volatility along the way, include Tesla, Amazon and Nvidia. Meanwhile, some investments have been disappointing and have been sold, such as Illumina, Carvana and Lilium.

The Scottish Mortgage managers say: “PDD is a young company with a very differentiated culture. It has firmly established itself as the value option in the Chinese consumer’s mind. PDD built its platform to resemble a ‘virtual bazaar’ where buyers browse and explore a full spectrum of products while interacting with one another. Buyers can share product information on popular social networks and invite their friends and family to purchase together, through which they enjoy not only the fun of discovery and shopping but a comprehensive selection of value-for-money products.

• Why this fund region is seeing record investor demand
• Will lower interest rates hurt these funds?

Scottish Mortgage is one of ii’s Super 60 list of recommended funds as an “adventurous” option. Head of funds research Dzmitry Lipksi says that the process is focused on identifying hyper-growth companies around the globe and holding them for a long period to benefit from compounding.

However, he says: “This portfolio leads to a very volatile performance profile. Over the last decade the trust has provided unparalleled results when the high-growth style has boomed, however, the extreme style position also leads to the opposite effect when conditions are tougher for growth.”

Scottish Mortgage shares have risen 309% over the past 10 years compared with 190% for the FTSE All World index. However, over three years they are down 35% compared with a gain of 24% for the benchmark.