Can Scottish Mortgage survive the tech wreck?

The chairman of the biggest and best-known investment trust suddenly quits.

Her exit follows the outspoken comments of a fellow director who questions whether the trust’s managers have the capacity to monitor its controversial stakes in private unquoted companies.

Naturally, some investors are alarmed by this disagreement – and by the sharp descent in the trust’s share price.

But other investors are buying, evidently persuaded that this bust-up in the normally sedate investment trust sphere could deliver change.

This may sound like the outline of the plot of a Netflix boardroom drama.

But these are some of the latest real-life events at Scottish Mortgage, the FTSE 100 trust where lenders are not the focus, despite the name.

Established 114 years ago to fund Malaysian rubber plantations, the £13.2billion trust today specialises in innovation, owning shares in US and Chinese tech giants like Netflix and the biotech specialists Illumina and Moderna.

These businesses have been brought to earth by the passing of the era of near-zero interest rates. Does their fate bring to an end the glory days at Scottish Mortgage, which was among the first backers of Jeff Bezos at Amazon and Elon Musk at Tesla?

Justin Dowley is to replace Fiona McBain as chairman. Will relationships between directors and managers henceforth be more harmonious and fruitful?

James Carthew, of analytics group QuotedData, comments: ‘The board works for investors. They should be prioritising answers rather than infighting.’

Scottish Mortgage has been the best performer in the global trust sector over the past decade – up 334 per cent over ten years.

But its share price has fallen by 58 per cent since its high of 1528p in November 2021 and now stands at a 19 per cent discount to the net value of the trust’s assets.

A high-risk trust should spring surprises. But as one of the trust’s investors, I would still like more information. The longer the uncertainty continues, the more comparisons that will be drawn between Scottish Mortgage and the Woodford fund which came to grief over unquoted stakes.

Such analogies may be unfair since, as Scottish Mortgage emphasises, most of its unquoted holdings are not in start-up businesses, but in substantial enterprises. The list includes Tik Tok owner Bytedance, payments group Stripe, and Space X, Elon Musk’s other vehicle.

Formerly, such investments proved lucrative when companies made their stock market debut, but there has been little such activity lately. Last year, as calculations from brokers Numis show, there was a 34 per cent average decrease in the value of these 92 stakes which account for 30 per cent of the portfolio.

Numis argues that the directors should make clear their stance on the competence of the managers, Tom Slater and Lawrence Burns.

The dissenting director Amar Bhide – who has now also quit – also demanded a new strategy, saying: ‘The fact that you’ve pulled it off for the last ten years has been due to an utterly aberrant period in financial history. Don’t delude yourself that you can keep playing this game.’

Other analysts also want more accountability, with some viewing the ethos at Baillie Gifford, the Scottish Mortgage management group, as arrogant, or even ‘cult-like’. Scottish Mortgage may not be exposed to the collapsed Silicon Valley Bank. But other Baillie Gifford funds and trusts hold shares in businesses that were customers of the bank.

Against this background, the brokers JP Morgan Chase have not waited for answers, but have downgraded Scottish Mortgage shares. They are following in the wake of Alan Brierley of Investec bank who declared the shares to be a sell in January.

Ben Yearsley of Shore Financial Planning sees the boardroom bust up as a reminder that the low-interest rate era that so benefited high-growth businesses is over.

This pessimism is not universal. Scottish Mortgage has been, in past days, the most popular fund on the Interactive Investor platform. Given the publicity over the unquoted portion of the portfolio – whose contents are fully detailed on the trust’s website – it is reasonable to assume that these investors have strong nerves.

I will continue to drip feed money into Scottish Mortgage because I regard this as a test of shareholder democracy. Will the directors recognise that they work for us? I am watching and waiting.

This post first appeared on Dailymail.co.uk