At one point, the shares were up 1,000% on our purchase price, making it a key contributor to the 17% annual return the portfolio achieved between launch and the end of 2021.
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As the trust has soared in value over the last decade, we’ve resisted the temptation to take profits mainly as a hedge against being wrong.
However, after a decade of market-beating returns, we’re now seeing what happens when the market turns against growth stocks.
After their outstanding run, shares in the trust have plunged 45% since the beginning of 2022.
Meanwhile, the trust’s discount to its underlying net asset value (NAV) has blown out to a 10-year high of 22%
These declines have wiped out most of the gains the trust achieved during 2020 and 2021, but its long-term performance is still impressive.
Over the past five years, the trust’s NAV has grown by 74.5%, compared to 57.3% for the FTSE All-World Index. Over the past decade, the NAV has gained 399% compared to 179.2% for the FTSE All-World Index.
The MoneyWeek view on the Scottish Mortgage Investment Trust
Despite its performance, the trust’s strategy hasn’t changed over the past year.
It continues to invest in the world’s greatest growth companies, whether they are public or private.
Unfortunately, this approach has fallen out of favour recently. Scottish Mortgage has a large portfolio of private investments, and over the past two years, investors have become increasingly concerned about private company valuations.
Private equity now accounts for 30% of the portfolio, close to the cap. Most of the holdings are small, but nine are in its top 30, including Northvolt (3.6%), SpaceX (3.2%), and ByteDance, the owner of TikTok (2.2%).
The firm revalued its private holdings 532 times last year, 84% of the holdings were revalued five times or more, with company valuations being written down by 28% on average.
Still, the trust’s discount to NAV suggests investors remain sceptical about the underlying values.
The trust has outperformed over the past decade by focusing on the companies of the future, holding these investments through thick and thin.
There will be some losers along the way, but in the long term, the winners more than make up for the losers.
Scottish Mortgage has owned 700 companies during the past two decades. Less than 5% have driven “all” of the returns, according to its co-manager Tom Slater.
Slater and his co-manager Lawrence Burns urged shareholders to remain “disciplined and patient” in the trust’s full-year earnings release.
The duo explained the “accelerating pace of change throughout the economy . . . has not translated into our investment results lately, but we need to remain disciplined and patient”.
And on that key pain point of the private portfolio, the co-managers defended the strategy, noting it gives shareholders low-cost access to companies “many of which have no public market equivalent.” The private portfolio also offers “a lens into the future” due to the fact businesses are tending to stay private for longer.
The managers also defended the trust’s “robust valuations process” and noted its largest private holdings are multi-billion dollar industry giants. “The companies that make up the bulk of our private company exposure are consequently neither small nor early-stage,” Burns explained. This suggests they’re less likely to suffer from the “material change in the funding environment . . . from a period of capital abundance to one of capital scarcity.”
The manager also cautioned “it is likely that a few of our smaller private company holdings may find themselves casualties of this new environment. Should this happen we expect the impact to represent only a small percentage of the portfolio’s assets.”
Scottish Mortgage Investment Trust’s private holdings
Scottish Mortgage’s public portfolio is much easier to value, but even this faced huge headwinds in 2022.
Nevertheless, the managers resisted the temptation to make any large changes. The only sale from its top holdings was Chinese tech giant Alibaba. Scottish Mortgage first bought the holding in 2012 when Alibaba was private. After a decade, the trust decided to reevaluate its position due to “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.”
A holding in Illumina was also trimmed. While this gene-sequencing company may still have a big role to play in the future of healthcare, its “execution has been disappointing.”
Other trades last year included a new holding in gaming company Roblox, cloud networking-provider Cloudflare, and adding to its holding in Latin American ecommerce and finance company, MercadoLibre.
What should investors do about Scottish Mortgage
Growth investing isn’t easy, and as Scottish Mortgage’s returns show, there can be periods of high returns followed by losses and extreme uncertainty. The question for shareholders is, will the trust recover?
There’s no clear answer to this question. Growth investing might struggle for some time as investors pull back from growth-at-any-price stocks. Indeed, there’s some evidence growth stocks outperform in periods of falling interest rates, but struggle when rates are rising. The opposite tends to be true for value stocks.
But there’s no denying Scottish Mortage owns some of the most exciting and innovative companies on the planet. If investors want to own a piece of these businesses, the trust is still one of the most attractive ways to do so considering its track record.
• Additional contributions from Ruth Emery and Max King.
• The authors of this article do not have holdings in Scottish Mortgage Investment Trust
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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