The Scottish mortgage has recovered this year, but is still well off its peak. Is now a good time to buy?

Scottish Mortgage was once the go-to fund for UK investors wanting access to fast-growing technology shares.

Former manager James Anderson, who left in 2022, was known for his string of successful bets in the technology sector, including Tesla and Amazon.

It is still one of the most widely managed trusts in Britain among private investors.

However, since the peak at the end of 2021 Scottish Mortgage Shares have fallen more than 40 percent to 895p as higher interest rates triggered a sell-off in technology shares.

Over the past year, Scottish Mortgage has managed to recoup some of its losses, but is still trading at a discount.

Could the recent recovery be the start of a new chapter for Scottish Mortgage, and is now a good time to buy?

How has Scottish Mortgage performed over the past year?

Scottish Mortgage was well placed to benefit from the technology boom during the pandemic.

In November 2021, the economy peaked at 1,050 cents, but fortunes turned as interest rates rose and rising inflation caused sentiment on the tech industry to sour.

Between 2022 and 2023, the portfolio’s value fell by 17.8 percent, while the share price fell by 33.5 percent.

The global industry average net asset value (NAV) fell 8.2 percent and the share price fell 13.6 percent.

All this took place against the backdrop of a boardroom discussion about governance and criticism of the supervision of interests in unlisted companies.

However, in the past year, Scottish Mortgage has made somewhat of a comeback.

In the 12 months to March 31, 2024, the share price rose 33 percent, while the net asset value lagged, up 11.5 percent in the same period.

In the latest results, the company also increased its dividend by 3.4 percent, meaning it has increased payouts for 42 years in a row.

Scottish Mortgage requires assessment over longer periods of time, due to the nature of its assets.

Over five years, Scottish Mortgage’s NAV has returned 91.2 per cent, while its share price has returned 78.7 per cent.

By comparison, the benchmark FTSE All-World Index returned 77 percent.

It comfortably outperformed the benchmark over the past decade, with its net asset value growing 381.9 percent, while its share price rose 358.4 percent.

What has caused the Scottish mortgage to recover?

Scottish Mortgage traded at a significant discount to net asset value, but a £1 billion share buyback announced in March has helped narrow the discount.

Before the announcement, Scottish Mortgage was trading at a 15 percent discount, which now stands at 7.78 percent.

Alex Watts, fund analyst at ii, said: ‘The discount narrowing throughout the period was a strong driver of returns, although the trust continued to trade at a discount throughout the year.’

Jason Hollands, director of Bestinvest, points to the news that activist Elliott Management has built up a public stake of more than 5 percent.

This has ‘added to the sense that confidence was a potential turning point and it is notable that both the discount has narrowed significantly to -7.8 per cent and Elliott has recently reduced their position.’

Elsewhere, Scottish Mortgage has been buoyed by the improved performance of its key holdings, such as chipmaker Nvidia, which is up 177 percent in the past year.

Chief executive Tom Slater said: “Demand for Nvidia’s chips has far exceeded expectations, which has been a key driver of our returns.”

Slater and his team have also increased their stake in Amazon, which has risen by 50 percent over the year, and it has regained its position as one of the trust’s top holdings.

“If AI revolutionizes the way we buy products, it will likely benefit Amazon, the company with the most consumer data and extensive physical infrastructure to get products to those consumers,” Slater says.

Deputy manager Lawrence Burns has highlighted how “profound and immeasurable” artificial intelligence will be.

Portfolio changes mean there is now heavy investment in AI, but that means if there is a slowdown in the sector it could hit the value of Scottish Mortgage’s assets.

Is it a good time to invest in a Scottish mortgage?

The move into AI-focused investing is likely to pique the interest of potential investors, especially in the wake of Nvidia’s blockbuster sales, which should help boost Scottish Mortgage.

However, there is a risk that “confidence will also come under severe pressure if the froth comes off the AI ​​shares at some point,” Hollands warns.

“There is also some embedded potential in the unlisted portfolio if IPOs start to pick up at some point.

‘One of the largest unlisted companies is Elon Musk’s SpaceX, which is reportedly considering a share sale that would value the company at $200 billion. Such a valuation would boost the intrinsic value of Scottish Mortgage.”

The trust’s unlisted holdings have proven controversial over the past year, but Scottish Mortgage continues to invest in the likes of Elon Musk’s SpaceX, TikTok owner ByteDance and fintech company Stripe.

These unlisted assets account for more than a quarter of the trust’s portfolio.

Unlike publicly traded stocks, which are repriced in real time, these private companies are repriced every three months, which comes with risks.

Recent results show that average valuations of unlisted shares increased by 9 percent over the year, below the 11.5 percent increase in the net asset value of the total portfolio over the same period.

Is it a good time for investors to take another gamble on Scottish Mortgage?

Hollands says that while it is unlikely that investors will be able to buy shares at a deep discount, “the continued share buyback program should prove very supportive for the time being.”

Laith Khalaf, head of investment analysis at AJ Bell, said: ‘Scottish Mortgage remains a high-octane investment proposition suitable only for investors with a long time horizon and an approach that is both patient and adventurous.’