The Scottish Mortgage (LSE: SMT) share price has been a stinker lately. It’s down 9.72% over the last year and 52.16% over two. That’s quite a comedown for what was the UK’s most popular investment trust at its height (and funnily enough, still is).
I was desperate to buy it three years ago, until I looked under the lid. I discovered that two-thirds of its portfolio was invested in US tech stocks, which looked overvalued to me at the time. I also wondered how many private investors were buying Scottish Mortgage based on past performance, without realising what they were getting.
Falling star
It took a severe beating in 2022, and deservedly so. I felt it had got carried away by its tech success, and was taking too many risks. Especially as it was loading up its private equity holdings at the same time. Former manager James Anderson – who spotted the potential of Tesla, Amazon and Alibaba early on and made Scottish Mortgage what it is today – picked a good time to retire that year. Co-manager Tom Slater was left to explain.
I’m a bit surprised that Scottish Mortgage hasn’t recovered this year. Its third-biggest holding is Tesla, which makes up 5.49% of the portfolio. Elon Musk’s electric car maker is up 120.93% year-to-date. Nvidia is the fourth biggest holding at 5.01%. Its shares are up 226.69% in 2023.
Yet Scottish Mortgage is up just 0.39%. Its portfolio must contain a heap of duds, if those two wonder kids can’t make a difference. Even its biggest position, chip maker ASML Holding at 7.32% of the portfolio, is up 25.95%.
Despite my reservations, I’ve made two modest purchases of £2k each this year, on 5 May and 1 August. I’ve mostly been buying FTSE 100 income stocks, and thought this would be a good way of getting some balance. So far I’m up a blockbuster 1.53%. That’s a life-changing £61.16 after charges. Whoopedoo.
I was therefore intrigued to see an article by an investment writer at Fidelity International asking whether Scottish Mortgage was “on the brink of a turnaround”. If it was, I haven’t seen much evidence of it, even though I’d like to.
Recovery play?
The article noted that Scottish Mortgage has a concentrated portfolio of just 37 different stocks. Its accounts show many are in “robust health”, as today’s tougher financial conditions are making them focus on profitable growth. After the sell-off, their valuations are more attractive too.
Scottish Mortgage also has significant exposure to unlisted companies, which make up 30% of its portfolio. That’s right up against the maximum for the fund.
Yet these aren’t unknown start-ups, as they include Musk’s SpaceX (which manufactures space craft and operates the Starlink satellite network) and lithium-ion battery producer Northolt. There’s speculation that both will float, which would give Scottish Mortgage a lift and reduce its private equity exposure. With the trust currently trading at a discount of 12.98% to net asset value, it looks tempting.
Despite that, I won’t be upping my stake. I’ve got more than enough exposure for my liking. Tom Slater is still on the naughty step, for me. A no-brainer buy? Hardly. It’s too risky for that. But the outlook may just look that little bit brighter and I’ll be along for the ride. Fingers crossed!
