Scottish Mortgage Investment Trust: Worth The Risk?

Scottish Mortgage Investment Trust PLC (LSE: SMT) is a low-cost investment trust based in the United Kingdom. The trust has a market cap of £19.2bn, making it the largest trust in the UK and the only conventional investment trust in the FTSE 100. The trust has thrived over the past decade from its holdings in technology companies, particularly Tesla. However, the share price of Scottish Mortgage Investment Trust has been volatile, making it unsuitable for investors with low-risk tolerance. So, should you buy it?

Scottish Mortgage Investment Trust's share price volatility

The share price of Scottish Mortgage Investment Trust has been volatile. On 24 July 2024, the stock fell by 2.94%, fluctuating between a day low of £849.60 and a high of £871.00. The price fell in six out of ten days, resulting in a 5.27% decrease over that period.

The stock is in the lower part of a weak rising trend in the short term, which could present a buying opportunity. However, if the lower trend floor of £843.97 is broken, it could indicate a slower rate of rising or a trend shift.

The share price history shows that the stock has had a period of poor performance. In 2022, the fund's net asset value fell by 39%, and the share price by 45.7%. The share price has also been impacted by rising interest rates, which caused a sell-off of the fund's holdings.

The volatility of Scottish Mortgage Investment Trust shares makes them unsuitable for investors with low-risk tolerance.

The trust's investment strategy

The Scottish Mortgage Investment Trust's strategy is to invest in the world's most exceptional growth companies, whether they are public or private. The managers employ an unconstrained approach to access companies across the globe. This has resulted in a concentrated portfolio of publicly listed stocks, as well as private holdings.

The trust's managers, Tom Slater and Lawrence Burns, are both partners at Baillie Gifford, the investment management firm that acts as the Alternative Investment Fund Manager and Company Secretary for Scottish Mortgage. Slater and Burns have significant personal investments in Scottish Mortgage, ensuring their interests are aligned with those of shareholders.

The managers use a set of questions to analyse companies, focusing on the opportunities available to a company over the long term, its ability to execute on that opportunity, management's stewardship, valuation relative to future opportunities, and where their views differ from the market. They aim to identify companies with sustainable competitive advantages in their industries, capable of growing earnings and cash flows faster than the market average.

The trust's largest holdings include well-known names such as chipmaker NVIDIA, online retailer Amazon, electric car maker Tesla, biotech giant Moderna, and the rocket and satellite company, Space Exploration Technologies.

Scottish Mortgage has attracted criticism for its significant unlisted exposure, with private equity accounting for 30% of the portfolio, close to the cap. However, most of these holdings are large, mature businesses rather than risky startups, and the fund actively revalues these holdings regularly.

The managers have defended the strategy, noting that it gives shareholders low-cost access to companies with no public market equivalent, and that the private portfolio offers "a lens into the future" as businesses tend to stay private for longer.

The trust's management team

The Scottish Mortgage Investment Trust is managed by Baillie Gifford, an independent investment management firm founded in 1908. The investment trust itself was launched in 1909 and has since grown into a global investment giant.

The investment brains behind the trust are Tom Slater and James Anderson. Slater joined Baillie Gifford in 2000 and became a Partner of the firm in 2012. He joined the Scottish Mortgage Team as Deputy Manager in 2009 and became Manager in 2015. Slater is also the Head of the US Equities Team and a member of another long-term growth equity strategy. His investment interests are focused on high-growth companies in listed equity markets and as an investor in private companies. Lawrence Burns was appointed Deputy Manager of Scottish Mortgage in 2021. He joined Baillie Gifford in 2009 and became a Partner of the firm in 2020. Burns' investment interests are focused on transformative growth companies. He is also a manager of Vanguard's International Growth Fund and co-manager of the International Concentrated Growth and Global Outliers strategies.

The trust's portfolio director is Claire Shaw, who joined in 2019. She spent over a decade as a fund manager, focusing on managing European equity portfolios for a global client base. Shaw is responsible for creating engaging content that makes the Scottish Mortgage portfolio accessible to all its shareholders. Stewart Heggie is the Commercial Director, who also joined in 2019. He previously spent 15 years as a discretionary fund manager and helped design the investment platform of a large UK bank. Heggie plays a key role in developing the company's strategic direction and broadening its ownership.

The trust's board of directors includes Justin Dowley, Vikram Kumaraswamy, Mark FitzPatrick, Sharon Flood, Patrick Maxwell, and Stephanie Leung. Dowley, a former international investment banker, became Chair of the board in 2023. Kumaraswamy, appointed to the Board in 2023, is the Head of Strategy and Corporate Development at Unilever. FitzPatrick, appointed to the Board in 2021, became Chair of the Audit Committee in 2022 and was appointed CEO of St. James's Place in 2023. Flood was appointed to the Board in 2023 and is a Non-Executive Director of Getlink SE and Cityfibre, where she is Chair of Audit. Maxwell, appointed as a Director in 2016, is the Regius Professor of Physic and Head of the School of Clinical Medicine at Cambridge University. Leung, appointed as a Director in 2023, is the Co-founder and CEO of KareHero Group, an enterprise that helps working adults balance their careers while caring for elderly relatives.

The trust's top holdings

The top holdings of the Scottish Mortgage Investment Trust are largely focused on tech stocks. As of March 2024, the top holdings were:

• PDD Holdings Inc
• Spotify Technology SA
• ASML (ASML)

Previously, as of March 2020, the trust's top holdings were:

• Amazon
• Tesla
• Tencent
• Alibaba

The trust's portfolio is driven by corporate attraction rather than index construction. The managers consider themselves owners of companies rather than renters of stocks. The trust's other holdings include:

• Moderna
• ASML (manufacturer of machines that make microchips)
• Baidu
• Tencent
• Illumina
• Intuitive Surgical
• Facebook
• Google
• Apple
• Samsung

The risks of investing in the trust

Investing in the Scottish Mortgage Investment Trust carries several risks that prospective investors should be aware of. Here are some key risks to consider:

• Market Risk: The value of investments in the stock market can fluctuate due to economic conditions, geopolitical events, and market sentiment. It's important to be prepared for potential ups and downs in the value of your assets.
• Credit or Default Risk: This is the risk that the entities or issuers of bonds or loans may fail to make promised interest payments or return your principal investment. Assess the creditworthiness of the issuer to manage this risk effectively.
• Liquidity Risk: Some investments held by the trust, such as private companies, may be less liquid, meaning they are not easily tradable. If you need to access your money quickly, you may have to sell these assets at a discount.
• Diversification Risk: While diversification is generally a risk reduction strategy, over-diversification can lead to mediocre returns. The trust's portfolio is relatively concentrated, with 50-100 equity holdings, and there are no fixed limits on geographical, industry, or sector exposure.
• Company-Specific Risk: Investing in individual stocks, such as those held by the trust, carries the risk of financial difficulties, poor management decisions, or other challenges that may cause a decline in stock value. To mitigate this risk, investors can diversify their portfolio by investing in multiple companies or using diversified investment vehicles.
• Volatility: With a heavy focus on growth stocks, the SMT share price has been quite volatile. This lack of stock price stability makes these shares unsuitable for investors with low-risk tolerances.
• Private Company Investing: The trust invests in private companies, which can be riskier than public companies as they may be less established, have less regulatory oversight, and their financial information may not be as readily available.
• Gearing Risk: The trust can borrow money to make additional investments, which can enhance returns in positive market conditions but may also amplify losses during downturns.
• Key Person Risk: The recent retirement of James Anderson, one of the lead fund managers, could impact the performance of the trust. While a successor has been appointed, any changes in leadership may affect the investment strategy and performance.

As with any investment, it is essential to conduct thorough research and carefully consider your risk tolerance, investment goals, and financial situation before investing in the Scottish Mortgage Investment Trust.

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