Interactive Investor

Scottish Mortgage unlisted valuations kept ‘fresh’ as markets nosedive

25th May 2022 09:39

Kyle Caldwell from interactive investor

In our interview, Scottish Mortgage explained how the unlisted businesses in its portfolio are valued. 

Lawrence Burns, the deputy fund manager of Scottish Mortgage (LSE:SMT), has reassured investors the current valuations of its unlisted companies are a fair reflection of the changes in valuations for comparable listed growth companies, following the sharp share price falls in public equity markets over the past couple of months.

Speaking to interactive investor’s Funds Fan podcast Burns pointed out that himself and lead manager Tom Slater are not involved in the process of valuing its unlisted holdings, which at the end of April accounted for 28.9% of the portfolio. The trust is a member of interactive investor’s Super 60 list

The company valuation process is carried out by a “valuations committee” at Baillie Gifford which takes advice from an independent third party, IHS Markit. It values a third of the private component of the portfolio each month, so each three-month period provides a full portfolio valuation.

Burns explained: “As fund managers neither Tom or I have anything to do with that process, it’s done at arm’s length, it’s independent from us or our views, we simply get notified of the changes after they’ve effectively been agreed.

“And what the committee are really trying to do is come to a fair value, by which we mean the price we think we would be able to achieve if we were to sell these holdings today in the open market.

“And that’s very different from what the fund managers, myself, and Tom, might think they’re worth on a 5 to 10-year view, it’s about if we were to go out and sell them today, what’s the best guess at what we’d be able to sell them for.”

In total, Baillie Gifford owns 52 unlisted companies. Top investments include payments group Stripe, rocket company SpaceX and battery firm Northvolt.

Burns acknowledged it is “very fair” to ask how quick these valuations updated when public equity markets are volatile.

He explained there are certain “trigger events” which prompt the valuations committee to “look and readjust the valuation”. One of those trigger events is “material change in the public market valuations that are feeding into that fair value market valuation”.

Burns explained: “What causes a trigger event, it could be a material change in company fundamentals, it could a new funding round, a decision to take the company public, or it could be material change in the public market valuations that are feeding into that fair value market valuation.

“So if you’ve got a company operating in one space, and all of its public market peers have come down a lot, you’d expect that to be a trigger event to relook at the valuation. And so, what we’ve seen in volatile markets is we’ve had quite a lot of those trigger events that has tried to make sure that the valuations remain fresh. It has made it quite a busy time I think, for our valuation committee, but I hope that gives detail, and reassurance.”

The past six months have been a testing time for shareholders in Scottish Mortgage, following a halving in its share price.

In its annual results last week, both the chair and the fund managers of the global trust called on shareholders to think long term and invest for a minimum of five years.

The types of companies Scottish Mortgage invests in – high-growth shares, including over a quarter of the portfolio in more speculative unlisted companies – have fallen out of favour on the back of high inflation levels and increases in interest rates. Instead, investors have been switching to companies with cheaper price tags - so-called value shares. 

The author owns shares in Scottish Mortgage, along with other investment trusts and funds.

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