Yahoo Finance Why you should buy Scottish Mortgage – even though it’s lost half your money
Scottish Mortgage has long been the crown jewel of Britain's investment trusts but it has suffered a painful fall from grace this year. Shares have lost half their value in the past six months and anyone who bought shares in the past two years has lost money.
Despite this poor run, the country's largest trust, by assets, is still held by hundreds of thousands of private investors in their Isas and pensions.
The wider market has punished Scottish Mortgage's high-growth, speculative style that has been so lucrative for long-term investors. The trust has returned more than 500pc in the past decade, largely on the back of successful bets on Tesla and other technology companies.
Now the shares are trading at an 11pc discount to the value of its portfolio – and analysts have hailed this a rare buying opportunity. So why should you back a fund that has lost half your money in just six months?
What are the risks?
James Yardley, of the broker Chelsea Financial Services, said that while Scottish Mortgage has been hugely profitable over the past 10 years, investors should remember that it comes with an increasingly high level of risk.
“Scottish Mortgage’s ‘growth’ style has gone from being one of the most loved strategies to the most hated,” he said. “Higher inflation and rising interest rates create an unfavourable environment for the type of high-growth companies that the trust backs, as it affects the value of their forecast profits.”
Mr Yardley added that another key risk was the trust’s exposure to China, where 15pc of its assets are invested. Scottish Mortgage’s Chinese holdings have cost investors severely in the past year, following a regulatory crackdown in its technology sector.
Manager Tom Slater told shareholders last week that he had made the wrong call on Chinese tech. “In retrospect, it has been a mistake to reduce our holdings in Western online platform companies rather than their Chinese counterparts,” he said.
However, the trust continues to hold a number of Chinese companies, including private businesses such as TikTok owner ByteDance.
Mr Yardley added: “ByteDance could be a great investment, especially as platforms like Facebook and Alphabet’s YouTube are blaming TikTok for losing market share.”
However, private companies are less transparent than their public equivalents, introducing another element of risk. The proportion of private investments in Scottish Mortgage has also grown, thanks to the sell-off in its listed stocks. Analysts at the broker Jefferies suggested that the trust now had 30.4pc of its assets in unquoted businesses, breaching its 30pc investment policy limit.
Matthew Hose, of Jefferies, warned that this would affect the trust’s ability to buy back shares in the future, as it could increase the size of the unquoted portion of the portfolio even further.
Why it could be time to buy
However, Scottish Mortgage’s ability to spot market winners in both private and public markets has been key to its success, such as its early positions in online retailer Amazon and electric car maker Tesla.
Ewan Lovett-Turner, of the broker Numis, said that because the trust was based on investment ideas that could take multiple decades to come to fruition, its share price would probably fluctuate dramatically.
“The manager and board have always highlighted that the approach could be volatile and returns will differ significantly from the market,” he said. “Clearly timing the bottom of the current selloff is extremely difficult, and it likely has further to go, but buying an approach which has a good long-term record at a time when it is out of favour is normally a profitable approach.”
Iain Scouller, of the broker Numis, agreed that the 11pc discount was a compelling case for investing. “Investors should cautiously look to pick up shares, on the assumption that it will see some recovery once the market looks beyond the cycle of interest rates.”
Scottish Mortgage said it discourages investors who may want their money back within five years from buying its shares.
