Scottish Mortgage has rebounded this year but is still way down on its peak

Scottish Mortgage was once the go-to fund for UK investors wanting access to high growth technology stocks.

Its former manager James Anderson, who left in 2022, was renowned for making a series of successful bets in the tech sector, including Tesla and Amazon.

It is still one of the most widely held trusts in the UK by private investors. 

However, since its peak in late 2021 Scottish Mortgage shares have fallen more than 40 per cent to 895p as higher interest rates triggered a sell-off in technology stocks.

Over the past year, Scottish Mortgage has managed to recoup some of its losses but it is still trading at a discount.

Could the recent bounceback be the start of a new chapter for Scottish Mortgage, and is it a good time to buy?

How has Scottish Mortgage performed in the past year?

Scottish Mortgage was in prime position to take advantage of the tech boom during the pandemic.

In November 2021 it reached a peak of 1050p, but its fortunes turned as interest rates rose and surging inflation caused sentiment to sour on the technology industry.

Between 2022 and 2023, the value of its portfolio fell 17.8 per cent, while its share price dropped 33.5 per cent. 

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The global sector net asset value (NAV) average was down 8.2 per cent and the share price 13.6 per cent.

This all took place against the backdrop of a boardroom spat over governance and criticism of its monitoring of holdings in unlisted companies.

In the last year though, Scottish Mortgage has staged somewhat of a comeback. 

In the 12 months to 31 March 2024, its share price jumped 33 per cent while its NAV lagged, up 11.5 per cent over the same period.

It also increased its dividend by 3.4 per cent in its latest results, meaning it has increased payouts for 42 consecutive years.

Scottish Mortgage asks to be judged over longer periods, because of the nature of its holdings.

Over five years, Scottish Mortgage’s NAV has returned 91.2 per cent while its share price has delivered 78.7 per cent in returns. 

By comparison, the benchmark FTSE All-World Index returned 77 per cent.

It far outperformed the benchmark over 10 years, with NAV growing 381.9 per cent while its share price rose 358.4 per cent.

What has helped Scottish Mortgage bounce back?

Scottish Mortgage has been trading at a significant discount to its NAV, but a £1billion share buyback announced in March has helped to narrow the discount.

Prior to the announcement, Scottish Mortgage was trading at a 15 per cent discount – that now stands at 7.78 per cent.

Alex Watts, fund analyst at ii said: ‘The discount narrowing throughout the period was a strong driver of returns, although the trust continued to trade at a discount throughout the entire year.’

 Demand for Nvidia’s chips has vastly exceeded expectations, which have been an important driver of our returns. Tom Slater, lead manager of Scottish Mortgage 

Jason Hollands, managing director of Bestinvest, points to the news that activist Elliott Management has built a disclosable stake of over 5 per cent. 

This has ‘added to a sense that the trust was a potential turning point and it is notable that both the discount has narrowed considerably to -7.8 per cent, and Elliott have reduce their position recently.’

Elsewhere, Scottish Mortgage has been buoyed by the improved performance of its key holdings like chipmaker Nvidia, which has soared 177 per cent in the last year.

Lead manager Tom Slater said: ‘Demand for Nvidia’s chips has vastly exceeded expectations, which have been an important driver of our returns.’

Slater and his team have also added to their holding in Amazon, which is up 50 per cent over the year, and it has regained its position as one of the trust’s top holdings.

‘If AI revolutionises how we purchase products, this is likely to favour Amazon, the company with the most consumer data and a vast physical infrastructure for getting products to those consumers,’ said Slater.

Deputy manager Lawrence Burns has emphasised how ‘profound and immeasurable’ artificial intelligence will be. 

Changes to the portfolio mean it is now heavily invested in AI, but that means that if there is slowdown in the sector it could hit the value of Scottish Mortgage’s holdings.

Is it a good time to invest in Scottish Mortgage?

The pivot to AI-focused holdings is likely to pique the interest of prospective investors, especially in the wake of Nvidia’s blockbuster sales, which should help to boost Scottish Mortgage.

However, there is a risk that ‘the trust would also be heavily exposed if the froth comes off AI stocks at some point,’ warns Hollands.

‘There is also some embedded potential in the unquoted portfolio if IPOs start to pick up at some point. 

‘One of the largest unquoted companies is Elon Musk’s SpaceX, which is reported to be considering a share sale that would value the company at $200billion. Such a valuation would provide a boost to the NAV of Scottish Mortgage.’

The trust’s unlisted holdings have proved contentious over the year, but Scottish Mortgage continues to invest in Elon Musk’s SpaceX, TikTok owner ByteDance and fintech company Stripe, among others. 

These unlisted assets account for more than a quarter of the trust’s portfolio.

Unlike listed equities which are repriced in real time, these private companies are repriced every three months so it comes with risks.

Recent results showed the average valuations for unlisted equities rose 9 per cent over the year, below the total portfolio’s 11.5 per cent NAV increase over the same period.

Is it a good time for investors to take a chance on Scottish Mortgage again?

Hollands says that while it is unlikely investors will be able to pick up shares at a deep discount, ‘the continued share buyback programme should prove highly supportive for sometime yet.’

Laith Khalaf, AJ Bell’s head of investment analysis says: ‘Scottish Mortgage remains a high octane investment proposition which is only appropriate for investors with a long time horizon and an approach which is both patient and adventurous.’