Ian Cowie: why I can’t quite bring myself to buy Scottish Mortgage

by Ian Cowie from interactive investor |

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Our columnist regrets never owning the UK’s largest investment trust, but despite its sell-off over the past month is not taking the plunge.

Buying opportunity or cheap for a reason? That’s the £4 billion question at Scottish Mortgage (LSE:SMT) investment trust where last month’s technology sell-off wiped that much off the stock market capitalisation of this £16.4 billion global giant. SMT now trades at a typical discount to net asset value (NAV) of around 4%.

Even after recent setbacks, SMT remains the top performer in the Association of Investment Companies (AIC) Global sector over the last year, five years and decade, with eye-stretching total returns of 125%, 388% and 820% respectively.

To put those numbers in perspective, the AIC Global sector averages are 73%, 175% and 335% respectively. So SMT not only beat the rest but delivered more than double its sector returns over the last five and 10-year periods.

This would be a good point at which to fess up to a painful truth, which is all the more important to declare because an occupational hazard of writing a column like this is to inadvertently seem rather smug. So laugh if you like but, for this small shareholder, SMT is one that got away.

James Anderson, (pictured below) who will celebrate 21 years at the helm of this money-making machine next month, was kind enough to spend some time explaining his strategy to me more than a decade ago. While I could see that technology was changing our world and would disrupt many established businesses, I failed to invest in SMT.

To be candid, I have been regretting that mistake ever since. Along with the rest of the Baillie Gifford stable of unit and investment trusts, SMT has been a big beneficiary of the digital revolution.

Anderson and his colleagues have shrewdly looked through traditional measures of value - such as profitability and price/earnings (P/E) ratios - to seek capital growth by investing in the winners of tomorrow. Here and now, that approach is not only reflected in the explosive total returns mentioned earlier but also, less happily, in SMT’s scarcely visible dividend yield of 0.3%.

That nugatory income isn’t even growing much, having risen by an annual average of 2.1% over the last five years, according to the AIC. This might not matter if interest rates and inflation remain near historic lows but it will weigh heavily on ‘jam tomorrow’ growth stocks if inflation and interest rates rise.

Those worries largely explain why SMT is where it is today. The share price plunged by 20% from its 52-week peak of £14.19 on February 16 but then staged a partial recovery to trade at £11.88 this week. That’s 16% below its peak.

No wonder bargain-hunters are buying into the only investment trust large enough to be listed in the FTSE 100 index of Britain’s biggest businesses. They are in good company with SMT being one of the most popular shares with interactive investor customers, as well as major institutional fund managers including BlackRock and Investec; both of whom are among its top 10 investors.

The bull case for SMT being a bargain - rather than merely cheaper than usual - is also strengthened by its reduced exposure to the electric carmaker, Tesla (NASDAQ:TSLA). By the end of last year, TSLA accounted for more than an eighth of SMT’s assets, which even enthusiasts for electric vehicles may have felt was too much of a good thing.

Since then, Anderson and his co-manager Tom Slater, have shrewdly taken profits and reduced their exposure to Tesla to nearer 5% of this trust’s assets. SMT’s January factsheet - the most recent available - shows this is still a pretty punchy portfolio with 30 top holdings accounting for 78% of total assets and 50 unlisted companies representing 16% of assets.

One of the most difficult lessons this DIY investor has had to learn over the years is not to worry about the past, because we will never be able to buy or sell there.  Instead, we can only ever invest today in the hope of returns in future.

That’s why, after wasting years thinking it was too late to invest, this Apple (NASDAQ:AAPL) customer - who bought my first computer from them more than 30 years ago - eventually took the plunge and invested in AAPL at $95 per share in February 2016. Allowing for last year’s four-for-one split, that’s the equivalent of $23.75 now. These shares traded at $126 this week and are now my second-most valuable holding.

But I still can’t quite bring myself to take the plunge at SMT yet. Part of the reason is unease about its exposure to China, where about a fifth of SMT’s assets are invested. Chinese digital giants Tencent (SEHK:700), Alibaba (NYSE:BABA) and Meituan Dianping (SEHK:3690) are among this trust’s top 10 assets. As discussed here before, I am worried about what is happening in China and would rather not have too much money there in case there is trouble to come.

Most immediately, at the age of 62 and engaged in an unpredictable racket like journalism, I am preparing to live off my investments in retirement. That makes a decent dividend yield, preferably with a good rate of growth, important considerations.

When I bought AAPL, it was yielding over 2% but SMT fails both criteria. So, although this top-performing trust is cheaper than it was - and might represent value for younger folk going for growth - I do not believe it is a bargain yet and this investor intends to sit out its success story for a bit longer.

Ian Cowie owns shares in Apple (AAPL) as part of a globally diversified portfolio.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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