Could Scottish Mortgage be on the brink of a turnaround?

One of the most popular investment trusts on Fidelity Personal Investing is Scottish Mortgage, which regularly appears in our monthly list of best sellers. Baillie Gifford’s £11bn flagship fund aims to identify, own and support the world’s most exceptional growth companies, an approach that the managers believe will maximise the long-term returns for shareholders.

For many years it was one of the top performing trusts in the country, but like many other growth-oriented mandates, it has suffered as interest rates have risen. The interim accounts for the six months to the end of September show how difficult things have been, with the NAV total return of -2.7% being a full 7% behind its FTSE All-World benchmark.¹

It is possible though that things are about to change, especially if interest rates have peaked. According to the accounts, the underlying companies are in “robust health” with the tougher financial conditions making them focus on profitable growth, while declining share prices have made the valuations more attractive.

The trust has a concentrated portfolio with the majority of the capital divided between 37 different stocks. At the end of September the 10 largest positions accounted for 46% of the assets and included: ASML, which makes semiconductors; the biotech giant, Moderna; electric car maker Tesla; and chip manufacturer NVIDIA.

Scottish Mortgage top 10 holdings

1. ASML 
2. NVIDIA 
3. Amazon 
4. MercadoLibre 
5. Moderna  
6. Tesla
7. Space Exploration Technologies 
8. PDD Holdings 
9. Northvolt 
10. ByteDance

Source: Scottish Mortgage, as at 31 October 2023

One of the features that differentiates Scottish Mortgage from its peers is the significant exposure to unlisted companies that made up 30% of the portfolio at the last reporting date. Half of this allocation is divided between 5 large, mature businesses like: SpaceX, which manufactures space craft and operates the Starlink satellite network; and Northvolt, a producer of sustainable lithium-ion batteries.

Manager Tom Slater says that the operational performance of their major private businesses has been strong, despite the difficult prevailing conditions. The broker Numis believes that this part of the portfolio could trigger a big change in sentiment for the fund, which is currently trading at a 15% discount to its net asset value (NAV).²

They say that the progress that has been achieved by Starlink, which now owns the majority of all active satellites, has prompted speculation that it might spin-out of SpaceX and list as a separate company. There are also press reports that Northvolt is considering an initial public offer (IPO) in 2024.

Numis believe that these events could be significant for Scottish Mortgage, as they would provide a highly visible valuation point and would reduce the unlisted element below the 30% limit that applies at the time of investment. 

Source:

¹ Scottish Mortgage 

² Numis Investment Companies Research, 6 November 2023

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in the Scottish Mortgage Investment Trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.