Scottish Mortgage has defended its investment strategy despite a painful year in which both its share price and the value of its portfolio have been in freefall.
Managers told shareholders they should remain ‘disciplined and patient’ despite recent stock market declines. Its share price has fallen a further 0.5 per cent in trading today.
Scottish Mortgage has become one of the UK’s most popular investment trusts after a series of successful bets in the tech sector, including Tesla and Amazon.
However, its fortunes have turned in recent months as the impact of rising interest rates and surging inflation caused sentiment to sour on the technology industry.
Call for calm: Scottish Mortgage chair Tom Slater asked shareholders to remain patient
The value of its portfolio, its net asset value, fell 17.8 per cent in the 12 months to 31 March 2023 to 816.8p, while its share price dropped 33.5 per cent.
Over the same period the FTSE All World Index returned 0.9 per cent while the global sector NAV average was down 8.2 per cent, and the share price 13.6 per cent.
Since then, shares have fallen from 678.60 to 618p, marking a 8.9 per cent decline.
The trust’s current NAV per ordinary share is 797.93, a further 2.3 per cent fall since the end of the March, meaning it is trading at a 22 per cent discount.
Tom Slater, who co-manages the £11.5billion trust with Lawrence Burns, said the ‘accelerating pace of change throughout the economy… has not translated into our investment results lately, but we need to remain disciplined and patient.’
He also reminded investors Scottish Mortgage is a ‘long-term investment and investors who share our belief in the underlying strengths of the portfolio expect to benefit from future outperformance.’
‘Predictability can have a deep allure as uncertainty grows and people are fearful… Buying predictability may provide temporary comfort, but it is by embracing discomfort that we can entertain the possibility of outsized returns from exceptional companies.’
Over the last decade, Scottish Mortgage’s NAV increased by 432 per cent, more than double the 181 per cent increase in the FTSE All-World index.
As well as a period of underperformance, Scottish Mortgage has been rocked by a boardroom bust-up over corporate governance rules.
Chair Fiona McBain announced her departure in March, just days after one of the company’s non-executive directors Amar Bhide launched an attack on the trust’s governance, accusing it of a ‘long series of procedural violations’.
Among the issues Bhide took aim at was the near 30 per cent allocation to privately owned companies within the portfolio.
Large investments in unlisted companies was one of the key factors behind the collapse of Neil Woodford’s fun in 2019.
However, in today’s results McBain said: ‘Five companies make up nearly half of the company’s overall exposure to private firms, and they have generally performed better than their publicly listed peers, raising money at higher valuations than last year, despite the market turmoil.’
The decline in listed technology stocks has not yet made its way through to privately held companies, with some investors concerned a huge fallout is yet to come.
Co-manager Burns defended the ‘robust valuation process’ for private companies and said that 532 revaluations occurred last year, with 84 per cent revalued five times or more.
This led the trust’s private company valuations to be written down 28 per cent.
Turnover in the portfolio was low and the trust’s only sale in its top 30 positions was in Alibaba.
This was ‘driven by concerns about the growth of big online platform companies in China after several regulatory interventions, as well as reflecting disquiet about deteriorating Sino-US relations,’ said Slater.
Scottish Mortgage has also ‘substantially reduced’ its holding in sequencing machine company Illumina because of ‘disappointing’ execution.
Dzmitry Lipski, head of funds research at interactive investor, said: ‘The trust has clearly struggled over the past year which has seen a seismic shift in the investment landscape amid runaway inflation and rising interest rates.
‘SMT’s recent underperformance remind us that while why Scottish Mortgage is an excellent adventurous holding but needs to be tempered with some lower risk options.
‘Investors should ensure their portfolios are well diversified and balanced without strong bias to any one style or market cap in order to control risk and limit losses within your portfolio.’
