Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

SCOTTISH Mortgage is investment trust royalty. It has been an enduring favourite with investors and has rewarded their loyalty with strong performance over the long-term.  However, its share price has tumbled in recent weeks as the tide has turned against many of its high growth holdings.

What’s gone wrong at the £17.7bn trust – and is it terminal?

The share price for Scottish Mortgage has dropped almost 30% in just three months. While the net asset value (i.e. the value of the underlying shares) has dropped less – 23% - these are still significant falls for one of the industry’s star performers. Investors may be questioning whether manager James Anderson has lost his Midas touch or perhaps has one eye on his retirement in April.

The reality is more prosaic. Baillie Gifford’s approach, of which Anderson was the architect, has been the perfect investment philosophy for an era of ultra-low interest rates. The investment group behind Scottish Mortgage focuses on finding high growth companies. Unfashionably, the group has always recognised that some of its holdings may lose money, but believes that finding just a handful of winners can have a dramatic impact on returns. A losing stock can only go to zero, but a winning stock can deliver multiple times the initial investment.

The long-term cash flows delivered by companies in the Scottish Mortgage Investment Trust portfolio have been highly prized in an era of low interest rates. This has seen the valuation of these stocks go sky high. The trust has benefited not only from the fast growth of these companies, but also their soaring valuations in a trend that has persisted for more than a decade.

The problem today is inflation. Rising prices has forced the hands of central bankers on interest rates. Long-term cash flows are not as valuable and that has knocked share prices for some of Scottish Mortgage’s key company holdings.

The underlying businesses are still growing rapidly. Moderna, for example, the trust’s largest holding, delivered $4.4 billion in revenue in the second quarter of 2021. This compared to just $67 million for the same period in 2020 – a rise of 65 times.1 Many of the trust’s other holdings – ASML, Tesla, Illumina – boast similar growth rates.

James Anderson hasn’t suddenly lost his touch; it’s just that the market conditions have changed. The challenge for investors deciding whether to stick with the trust is the question of whether market conditions will flip back in the short-term? Then there’s the question marks around Anderson’s retirement. Co-manager Tom Slater has been on the fund for many years, but many may question whether Anderson’s influence as a thoughtful and skilled investor, will be missed.

Investment trust analyst Stifel put out a buy rating on the trust, saying that the trust’s pipeline of private equity holdings should sustain returns. “None of us know when the growth stock de-rating will reach the low point, but taking a contrarian view, the shares are starting to look interesting,” it said.2

Perhaps the best words of advice come from Tom Slater himself before the recent wobble in share prices: “We would caution against elation after the past twelve months just as we would counsel against misery following unprofitable years. To create long term value, we seek companies pursuing big opportunities and investing in projects with uncertain payoffs. Their shareholders will need to hold their nerve, take the long view and offer thoughtful ongoing support.”3

More on Scottish Mortgage Investment Trust

Five year performance

(%) As at 26 Jan

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Scottish Mortgage 39.1 1.3 25.5 120.1 -16.6

Past performance is not a reliable indicator of future returns

Source: FE, total returns, 26.1.22

Source:

1  European Pharmaceutical Review, 13 August 2021
2  Portfolio Adviser, 20 January 2022
3  Scottish Mortgage Annual Report and Financial Statements 31 March 2021

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. The shares in Scottish Mortgage Investment Trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Scottish Mortgage invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. The trust also invests in emerging markets which can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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