Scottish Mortgage (LSE:SMT) shares are a firm favourite with private investors. The stock regularly features in the ‘Top of the Stocks’ section of the Hargreaves Lansdown website. But the fund’s shares have fallen by 30% over the past year.
Does this mean the stock is now a bargain?
Each day, Scottish Mortgage publishes the net asset value (NAV) of the fund.
Four different figures are provided but the one most commonly used is ‘Cum[ulative] Fair NAV’. This is the market value of the investments owned, plus income received in the current financial year, less debt expressed in current prices, divided by the number of shares in issue.
By comparing this to the current share price it’s possible to determine whether the fund is fairly valued.
Yesterday, the NAV was 825p. However, the share price is currently around 670p. The fund is therefore trading at a 19% discount to its fair value.
Historically, the share price has been quite close to the NAV. The differential is now the largest it has ever been.
The stock looks like a bargain to me.
Portfolio companies
Scottish Mortgage invests primarily in high-growth companies in the technology, healthcare, and consumer goods sectors. These have recently fallen out of favour with investors. But with inflation now falling in the US, there are encouraging signs that an economic recovery is not too far away.
This can only be good news for the companies in the fund’s portfolio. At the end of March, 57% of its investments were based on the other side of the Atlantic.
At the same date, the top five holdings accounted for 29.7% of its value. And a strong investment case could be made for each one.
Moderna hopes to have developed a cancer vaccine by 2030. ASML cannot produce enough semiconductors to meet demand. Tesla achieved record deliveries in the last quarter. MercadoLibre grew its total payments volume by 60% in 2022. And SpaceX now has one fewer competitors with the recent bankruptcy of Virgin Orbit.
| Holding | Business | % of fund | Stock movement (5 years) (%) |
| Moderna | Vaccines | 8.6 | +745 |
| ASML | Semiconductors | 8.0 | +245 |
| Tesla | Electric vehicles | 5.1 | +855 |
| MercadoLibre | Online marketplace (Latin America) | 4.5 | +290 |
| Space Exploration Technologies | Space exploration (Elon Musk) | 2.5 | Unlisted |
All about the long term
Although the fund struggled in 2022, this will be of no concern to the fund’s investment manager. Baillie Gifford is only interested in the long term. It argues that a large number of clever people spend a huge amount of time focussing on the short term.
Baillie Gifford claims that it can obtain a competitive advantage by having an investment horizon of at least five years, and usually a decade or more.
This approach appears to work. Looking back over the past five financial years, the fund has recorded cumulative gains of £10bn on the value of its investments.
| Financial year (31 March) | 2018 | 2019 | 2020 | 2021 | 2022 |
| Gains/(losses) on investments (£m) | 1,203 | 924 | 1,018 | 9,265 | (2,421) |
What do I think?
Buying Scottish Mortgage shares is a good way of achieving a diversified portfolio through the ownership of just one stock.
But critics will argue that it’s too heavily exposed to the tech sector. And that it’s difficult to accurately value (and sell) its shareholdings in unlisted companies.
However, in my opinion, Scottish Mortgage shares are currently attractively priced.
I believe the discount at which the fund’s shares trade at will soon narrow. If I’d some spare cash then I’d be happy to include them in my portfolio.
