Introduction
In the financial labyrinth, every investor aims to unearth a minotaur—the metaphorical beast representing an investment vehicle that delivers robust returns and consistently does so. However, such investment opportunities are as rare as a philosopher’s stone. The Scottish Mortgage Investment Trust (SMT) is a century-old investment vehicle listed on the London Stock Exchange and managed by one of the best and most esteemed fund houses globally – Baillie Gifford. Today, we dig into some of the layers of SMT to answer an important question: Is it a good time to invest in the Scottish Mortgage Investment Trust, and what are the benefits?
Unveiling the Essence: What is SMT?
The Scottish Mortgage Investment Trust was founded in 1909 and is no rookie in the investing world. Its primary aim is to identify, own, and support the crème de la crème of global growth companies that are shaping the world in their infancy or start-up phase. SMT has a high pedigree of finding these “golden egg” companies and providing investors with exposure to the best global companies long before they are household names or listed and traded companies on leading global indices. As a result, they can maximize investor returns in these companies, ranging in “multi-bagger” returns. In recent years, SMT invested in some of these companies, such as Netflix, Uber, and Tesla. Until 2019, SMT was the second-largest shareholder (around 8%) in Tesla (behind Elon Musk) and was rewarded handsomely for their belief in the revolutionary technology and business model of Tesla. What is also increasingly apparent is that these new and upcoming companies have a reduced appetite to list on major global stock markets due to the increased regulatory and compliance pressures. Many up-and-coming companies are owner-found and would instead prove their business model and capitalize on their growth in a private environment before listing on any primary global index.
Current Portfolio Overview:
SMT currently holds more than GBP 13 billion in Assets, and its investment strategy gives it the lion’s share in sectors shaping our future—technology, healthcare, and renewable energy.
and as of September 30, 2023, the Trust’s key holdings include:
– ASML: 7.3%
– Moderna: 6.1%
– Tesla: 5.5%
– NVIDIA: 5%
– MercadoLibre: 4.6%
– Amazon: 4.2%
Private Equity Exposure: The Silent Catalyst:
An intriguing facet that sets SMT apart is its approximately 30% exposure to unlisted equities, commonly known as Private Equity. This offers investors a way to diversify their portfolios and gain exposure to companies before they hit the public market—a rare opportunity often only available to institutional investors. These companies have the potential to provide the golden ticket to capitalize on high-growth startups before they hit the public market. Some of these companies include the following names:
These aren’t small companies either, with four valued at over $60 billion. Three of these companies make the top 10 holdings of the entire SMT.
Some skeptics will say that the lack of transparency from Private Equity holdings provides too much risk and that the current global interest rate environment will result in liquidity issues for these private equity holdings. In the past 18 months, Scottish Mortgage has performed 871 revaluations of their private equity holdings, with more than 75% of these companies being revalued five times or more. The result has found that by the end of 2023, 47% of the private equity holdings will already be profitable and cash-generative; within four years, they further estimate that 91% of their private equity holdings will be profitable and cash-generative.
Performance and Cost:
Currently, the Trust is trading at a 16.80% discount to its Net Asset Value (NAV). This provides an enticing entry point for new investors looking to capitalize on the Trust’s strong portfolio without paying a premium. We believe that the Trust has been discounted heavily due to Macro drivers (inflation/interest rates) rather than the underperformance of the companies it holds and invests in. While historic results are no guarantee for future performance, those who have been invested in Scottish Mortgage for the long term have seen substantial results. The SMT share price has produced an annualized return of 15,80% (GBP) in the last ten years, even though they’ve lost nearly 50% of their share price since Nov 2021.
See annualized GBP below:
The volatility in SMT due to the growth nature of their holdings is not for the fainthearted. As shown in the table above, they have traded similarly to a single stock, in this case, Amazon, in the short and medium term. SMT’s equity-centric portfolio does expose it to market volatility, particularly in uncertain times impacted by interest rates and inflation.
The Trust’s ongoing management charge is a lean 0.34%, which is highly competitive in the industry and remarkably low for its services.
Is Now the Right Time?
The Scottish Mortgage Investment Trust offers a compelling blend of a diversified high-growth portfolio. Its exposure to private equity allows investors a rare opportunity to diversify in ways not commonly available. With the current 16.80% discount to NAV and considering ongoing global economic conditions, there’s a solid argument to be made that now is an opportune time to invest in SMT. If you are a working-class professional with an informed palette for global financial trends, this might be a robust allocation in your overall investment strategy.
Conclusion
In the perpetual motion machine that is the financial market, it’s hard to find a gear that fits all sizes and aspirations, and SMT is no different. This holding can potentially boost your returns but comes with high volatility. Many investors believe that it is an opportune time to invest in SMT, given its current NAV discount and Private Equity exposure. At Paragon Wealth Managers, we do hold SMT in our client portfolios and use this as part of our “growth allocation” while considering the overall risk profile.
*Disclaimer: Investment involves risks. Please consult your financial advisor before making any investment decisions. *
