Is now the perfect time to buy flagging Scottish Mortgage?

Britain’s favourite investment trust is available at a bargain price, writes Lauren Almeida

Scottish Mortgage has long been the crown jewel of Britain’s investment trusts, but it has suffered a painful fall from grace this year: its shares have lost half their value in the past six months.

Despite this poor run, the country’s largest trust, by assets, is still held by hundreds of thousands of private investors in their Isas and pensions.

The wider market has punished Scottish Mortgage’s high- growth, speculative style that had been so lucrative for long-term investors. The trust has returned more than 500pc in the past decade, largely thanks to successful bets on Tesla and other technology companies.

Now the shares are trading at an 11pc discount to the value of the portfolio – and analysts have hailed this as a rare buying opportunity. But why should you back a fund that has lost half your money in just six months?

James Yardley of the broker Chelsea Financial Services said that while Scottish Mortgage had been hugely profitable over the past 10 years, investors should remember that it came with an increasingly high level of risk.

“Scottish Mortgage’s ‘growth’ style has gone from being one of the most loved strategies to the most hated,” he said. “Higher inflation and rising interest rates create an unfavourable environment for the high-growth companies that the trust backs, as it affects the value of their forecast profits.”

Mr Yardley said another key risk was the trust’s exposure to China, where 15pc of its assets are invested. Scottish Mortgage’s Chinese holdings have cost investors severely in the past year following a regulatory crackdown in China’s technology sector.

The trust’s co-manager Tom Slater told shareholders last week that he had made the wrong call on Chinese tech. “In retrospect, it has been a mistake to reduce our holdings in Western online platform companies rather than their Chinese counterparts,” he said. Scottish Mortgage continues to hold Chinese companies, including private businesses such as TikTok owner ByteDance.

Private companies are less transparent than their public equivalents, which introduces another element of risk. The proportion of private investments in Scottish Mortgage has also grown because of the sell- off in its listed stocks.

Analysts at the broker Jefferies suggested that the trust now had 30.4pc of its assets in unquoted businesses, in excess of its 30pc investment policy limit. Matthew Hose of Jefferies warned that this could affect the trust’s ability to buy back shares – which trusts do to reduce the discount – in future, as it would increase the size of the unquoted portion of the portfolio even further.

However, Scottish Mortgage’s ability to spot winners in both private and public markets, typified by its early positions in Amazon and Tesla, has been key to its success. Ewan LovettTurner of the broker Numis said that because the trust was based on investment ideas that could take multiple decades to come to fruition, its share price would probably fluctuate dramatically.

“The manager and board have always highlighted that the approach could be volatile and returns will differ significantly from the market,” he said. “Clearly, timing the bottom of the current sell-off is extremely difficult and it is likely to have further to go, but buying an approach that has a good long-term record at a time when it is out of favour is normally a profitable approach.”

Iain Scouller of the broker Stifel agreed that the 11pc discount made a compelling case for investing. “Investors should cautiously look to pick up shares on the assumption that it will see some recovery once the market looks beyond the cycle of interest rates.”

Scottish Mortgage said it discouraged investors who might want their money back within five years from buying its shares.