Scottish Mortgage (LSE: SMT) shares have been plugging along nicely lately, although I wouldn’t say they’re flying. With 12-month growth of 18.6%, they’re trailing the FTSE 100’s solid 20% growth and the yield is lower too.
For a tech-focused investment trust that can be highly volatile, that’s a bit disappointing. To be fair, technology isn’t quite the extravaganza it was, as investors fret about an artificial intelligence bubble.
Top FTSE 100 investment trust
I bought Scottish Mortgage Investment Trust in the summer of 2023 and, being up 75%, I’m not complaining. But I haven’t forgotten the 2022 crash, when it lost more than half its value. I also remember comparing it with Polar Capital Technology Trust, another FTSE 100-listed fund in the same space. Polar Capital outperformed Scottish Mortgage across every timeframe and continues to do so, up 40% over the past year. Over five years, it’s up 118%, while Scottish Mortgage is down 3%.
Arguably, I backed the wrong horse. But now there’s renewed excitement around Scottish Mortgage because it was an early investor in Elon Musk’s SpaceX. Still privately owned, SpaceX is rumoured to be listing this summer, and it could be a monster, with valuations as high as $1.5trn being whispered.
That wouldn’t quite top Saudi Aramco’s $1.7trn listing in 2019, but it would come close. With ChatGPT owner OpenAI also expected to float, this could be quite a year for blockbuster IPOs.
SpaceX is now Scottish Mortgage’s single largest holding, accounting for around 15% of the portfolio. What happens to SpaceX will have a major influence on how Baillie Gifford’s flagship trust does in the near future.
In December, Scottish Mortgage hiked its valuation of SpaceX by 87%. Its stake is now valued at £2.2bn, up from just £508m in September, according to the Association of Investment Companies.
Exposure to Starlink
Scottish Mortgage isn’t the only way to access SpaceX. Edinburgh Worldwide Investment Trust has a 16% allocation, while Baillie Gifford US Growth Trust has exposure of around 11%.
Best known for developing commercial rockets, SpaceX actually makes most of its money from its Starlink satellite internet service, estimated to generate $11.8bn a year. As a private company it doesn’t publish accounts, so we can’t be sure.
Investors tempted by the hype should tread carefully. AJ Bell’s Russ Mould warns that an IPO would shine a harsh light on SpaceX’s finances. He asks: “How willing they will be to back a mission to Mars, when it is the Starlink satellite business which looks the real moneymaker?”
Today, Scottish Mortgage trades at an 8.2% discount to net asset value, so investors are arguably getting SpaceX exposure at a reduced price, and holdings such as Nvidia, TSMC, Amazon and ASML on similar terms. Investment trust discounts are funny things though. There’s no guarantee they will close. They can widen.
It’s also a leveraged trust, borrowing to invest, which adds risk. Investors are also relying on the managers to outperform, and recent comparisons with Polar Capital suggest that hasn’t happened. Scottish Mortgage remains volatile, as 2022 proved. A SpaceX flotation could generate huge excitement, but investors need to look past that and consider whether this is a trust they want to hold for the long-term. I think it’s worth considering, but take a look at Polar Capital too.
