Scottish Mortgage defends strategy despite huge share price fall

Scottish Mortgage has defended its investment strategy despite a painful year in which both the share price and the value of its portfolio were in freefall.

Managers told shareholders to remain “disciplined and patient” despite the recent stock market declines. The share price is down another 0.5 percent in trading today.

Scottish mortgage has become one of the most popular investment funds in the UK following a series of successful bets in the tech sector, including Tesla and Amazon.

However, fortunes have turned in recent months as the impact of rising interest rates and rising inflation has worsened sentiment in the tech industry.

The value of his portfolio, his net asset value, fell 17.8 percent to 816.8 pence in the 12 months to March 31, 2023, while the share price fell 33.5 percent.

Over the same period, the FTSE All World Index returned 0.9 percent, while the global sector NAV average was down 8.2 percent and the share price was down 13.6 percent.

Since then, shares have fallen from 678.60 to 618p, a drop of 8.9 percent.

The trust’s current NAV per common share is 797.93, a further decline of 2.3 percent since the end of March, meaning the trust is trading at a discount of 22 percent.

Tom Slater, who co-manages the £11.5bn trust with Lawrence Burns, said ‘the accelerating pace of change across the economy…has not translated into our investment results of late, but we need to be disciplined and patient to stay’.

He also reminded investors that Scottish Mortgage is a “long-term investment and investors who share our belief in the portfolio’s underlying strengths expect to benefit from future outperformance.”

“Predictability can have a deep appeal when uncertainty mounts and people are fearful… Buying predictability can provide temporary solace, but embracing discomfort allows us to nurture the possibility of exorbitant returns from exceptional companies.”

Over the past ten years, Scottish Mortgage’s NAV has risen 432%, more than double the 181% increase in the FTSE All-World index.

In addition to a period of underperformance, Scottish Mortgage was rocked by a boardroom row over corporate governance rules.

Chairman Fiona McBain announced her departure in March, just days after one of the firm’s non-executive directors, Amar Bhide, launched an attack on the trust’s board, accusing it of a “long string of procedural violations.”

One of the issues Bhide focused on was the allocation of nearly 30 percent to private companies within the portfolio.

Large investments in privately held companies were one of the main factors behind Neil Woodford’s fun collapse in 2019.

However, in today’s results, McBain said, “Five companies make up nearly half of the company’s total exposure to private companies, and they have generally outperformed their publicly traded peers despite the market turmoil.” ‘

The decline in publicly traded technology stocks has not yet made its way to private companies, and some investors are concerned that huge ramifications are yet to come.

Defending the “robust valuation process” for private companies, co-manager Burns said there were 532 revaluations last year, of which 84 percent were revalued five times or more.

This led to the trust’s private company valuations being written off by 28 percent.

Portfolio turnover was low and the trust’s only sale in the top 30 positions was in Alibaba.

This was “motivated by concerns about the growth of large online platform companies in China following several regulatory interventions, as well as concerns about deteriorating Sino-US relations,” Slater said.

Scottish Mortgage has also ‘significantly downsized’ its stake in sequence machine company Illumina over ‘disappointing’ execution.

Dzmitry Lipski, head of fund research at interactive investor, said: “Confidence has clearly struggled over the past year with a seismic shift in the investment landscape amid runaway inflation and rising interest rates.

SMT’s recent underperformance reminds us that while Scottish Mortgage is an excellent adventurous position, it needs to be tempered with a number of lower risk options.

“Investors should ensure that their portfolios are well diversified and balanced without a strong preference for a particular style or market capitalization in order to manage risk and limit losses within your portfolio.”