Scottish Mortgage performance dip: a reminder why rebalancing matters

interactive investor’s head of funds research examines one of the most widely held investment trusts.

The recent volatility in the performance of industry giant Scottish Mortgage (LSE:SMT)Investment Trust is a timely reminder of the importance of rebalancing your portfolio, says interactive investor, the UK’s second-largest direct-to-consumer investment platform.

Rising bond yields and inflation fears, not to mention the tech sell-off, have buffeted the FTSE 100 investment trust.

Time will tell, but since hitting 950p per share on Monday morning, Scottish Mortgage’s share price has been starting to claw back some of the losses it sustained in recent weeks, but this is an adventurous trust and it was never going to be a smooth ride – especially after an 111% share price total return in 2020.

The recent roller-coaster ride is also noteworthy, because Scottish Mortgage is one of the most widely held investment trusts in the sector, and it is also the largest by a country mile. So, rightly or wrongly, the trust could be seen as something of a bellwether for the wider investment trust sector from a sentiment perspective.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “We continue to rate Scottish Mortgage Trust as a good adventurous/satellite holding for investors to gain exposure to exciting disruptive growth companies, public and private, selected by highly experienced managers: James Anderson and Tom Slater.  

“The strength of their stock-picking skills combined with strong risk-adjusted performance and competitive fees make this a good choice for long-term investors. The trust seeks to add value over five-year time frames and has achieved this in spades.

“Investors should remember that it is higher-risk investment due to high portfolio concentration, exposure to unquoted companies and gearing, so it works better as a satellite holding in a well-diversified portfolio.

“With equity market volatility on the rise, investors need to review both their time horizon and position sizes for each holding in their portfolio. Investors shouldn’t let any holding become more than 10-15% of their portfolio by profit-taking or/and portfolio rebalancing.

“It is worth noting that the board has the ability to issue new shares while at a premium and to buy back shares to control the discount. The recent share price sell-off caused the trust to trade on more than a 10% discount but it has now narrowed to around 4% as the board-initiated share buy backs.

“The trust employs a disciplined valuation process and cut the value of its unquoted investments in response to the coronavirus market sell-off in March last year.”