Potentially attractive discount for a long-term investor: Scottish Mortgage

SMT’s discount may prove attractive for a long-term investor willing to accept the ups and downs of a high growth strategy…by Nicholas Todd

Overview

Scottish Mortgage (SMT) is managed by Tom Slater and the recently appointed deputy manager, Lawrence Burns. Tom succeeds long-standing manager and industry veteran James Anderson, following his appointment as co-manager in 2015 and deputy manager in 2009. As a result, the strategy has not changed. SMT aims to generate superior returns for shareholders through investing in a portfolio of global equities and taking a highly active, long-term approach.

As discussed in Performance, the strategy has performed well over the long term, generating an annualised NAV total return of 20.5% versus the Global sector benchmark of 11%, over a ten-year period. This has resulted in SMT becoming the largest investment trust in the FTSE, benefitting investors through the transfer of exceptionally low fees.

Tom and Lawrence seek companies that can deliver exceptional returns, investing in them during the early stages of development to capture long-term organic growth. As discussed in Portfolio, in recent years, this has resulted in a greater allocation to private companies, which now make up almost a third of the portfolio.

Furthermore, the managers invest into new, disruptive technologies, focussed on tackling underlying structural challenges centred predominantly around global digitisation and the internet. They see opportunities to allocate more to manufacturers, especially those aligned with the renewable energy transition, which have exposure to new ‘emerging’ technological centres, such as China.

The managers utilise a Gearing facility which at the current level of 14% is higher than the five-year average of 7.9%. Currently, SMT trades at a Discountof 12.7% and less risk-averse investors may see this as a good entry point.

Analyst’s View

Scottish Mortgage (SMT) has been impacted over the last 12 months. Largely, this is due to a shift in investor sentiment as geopolitical pressures remain heightened, inflationary pressures persist, and interest rates remain on an upward trajectory.

This scenario has resulted in a broad-based higher-risk strategy sell-off which has hit, particularly, technology-focussed, concept stocks whose valuations rely heavily on forward-looking cash-flow projections.

However, as discussed in Performance, the managers’ consistently high-conviction and active investment approach, remains seemingly unaffected following the transition to Tom Slater becoming sole manager in April 2022. We believe this uncompromising investment approach has been the driving force behind SMT’s significant annualised outperformance of the peer group and the benchmark over the past decade, and as longer-term economic conditions begin to ease, it may present further opportunities for SMT to flourish.

SMT’s allocation to private companies, that are traditionally harder to access for investors, in addition to the greater allocation to the ever-growing Chinese market, despite recent regulatory pressures, both offer genuine diversification benefits away from some closet index-plus strategies.

Naturally, the strategy is volatile and highly susceptible to periods of significant drawdowns and may be impacted adversely, as the cost of borrowing rises, and investor capital is harder to come by. However, the manager’s focus on operational companies that are gaining market share should be less susceptible to failure and balance out the development-stage, higher-risk stocks in the portfolio.
 

Bull

• Long-term track record of outperformance and alpha generation through highly active approach
• Offers significant exposure to unlisted early-stage companies
• Fees are very competitive for an active fund

Bear

• Persistent inflation and high interest rates have proven to be headwinds for the strategy
• High-conviction single stock positions can enhance volatility of returns
• Increased allocation to private companies may present liquidity problems if demand for the trust continues to fall

 
See the latest research on SMT here > 
 

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Disclaimer
Disclosure – Independent Investment Research
 
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.