Scottish Mortgage (LSE: SMT) shares smashed the FTSE 100 for years, making investors fortunes. At one point, the UK’s best-known investment trust was up 500% over a rampant five-year spell.
Investors put the tech-focused fund in their portfolios in a bid to generate a heap of growth and, with luck, make a million for their retirement. If I had no savings at 35, this is the type of fund I’d have bought to build wealth at speed.
Investors have been losing money
But last year, Scottish Mortgage came unstuck. The fund’s managers had made an outsized bet on volatile US tech stocks such as Tesla, and when they crashed, it crashed harder. I saw the writing on the wall after realising that three quarters of the fund was invested in shares that I felt were trading at bubble valuations. In 2022, investors lost half their money. Suddenly, making a million didn’t look that easy.
Getting scorched by Tesla and the rest wasn’t the only reason that co-managers Tom Slater and Lawrence Burns have some explaining to do. Gearing at the trust hit 18% at one point (it’s now down slightly to 15%), upping the risk.
Last year, the fund hit its ceiling of investing no more than 30% of the fund in private, unquoted investments. That ceiling was doubled from 15% six years ago. This makes the fund risky, illiquid, and is the main reason it now trades at a whopping discount of around 22%.
Another impact is that it means Scottish Mortgage will also struggle to participate in future funding rounds as unquoted companies in its portfolio grow. Again, the managers appear to have got carried away.
Its unquoted holdings aren’t all tiny, unprofitable companies. They include Elon Musk’s SpaceX, EV battery maker Northvolt, retail website operator Brandtech, short video sharing platform Bytedance and US payments processor Stripe. These are undoubtedly exciting, but not without risk.
It could come good in time
2023 has been great for US tech, with the Nasdaq up a third. Yet Scottish Mortgage is down another 6.94% year to date. Measured over 12 months, it’s down 8.17%. Which is odd given that its top five holdings include Tesla and Nvidia, which are up 158.85% and 196.28% this year. It must have a long tail of underperformers dragging it back.
At the recent AGM, Slater and Burns admitted they’d made some “bad picks” after getting carried away with “misplaced enthusiasm”. Yet they also reminded disgruntled investors that this is likely to be a volatile fund.
I actually bought Scottish Mortgage last month, despite my reservations. It gives me exposure to growth sectors that I don’t have elsewhere. I plan to hold for a minimum five to 10 years, to give it time to put things right.
I can take this risk because I already have a balanced portfolio of stocks and funds. If I had no savings at 35, I’d still consider buying Scottish Mortgage. Yet I would temper my expectations. It definitely has a place in a broader, well-diversified blend of shares and funds, assembled with the aim of building a £1m pot by the time I’m 67. But given its bumpy track record, I wouldn’t invest more than 5% of my overall portfolio in this one stock.
