Scottish Mortgage Investment Trust (LSE: SMT) registered a share price return of 110% in 2020. Its portfolios exposure to US and Chinese tech companies paid off handsomely during the worst years of COVID-19. That year might be considered an anomaly. But, SMT has been performing well for decades. From April 2001 to April 2002 SMTs delivered a staggering 1,700% returning, equivalent to turning a £1,000 investment into £18,000.
That roughly 20 year period coincide with the managerial reign of James Anderson. He was the one who was early to spot potential in technology firms such as Tesla, Amazon and Alibaba and to venture into investing in unlisted companies which has been the hallmark of SMTs hyper growth investment strategy.
Growth stocks
But recent months, and years, have not been so kind to investors in SMT. Those who bought in at its November 2021 peak will be sitting on a +50% loss. The SMT share price dropped 46% in 2022.
Rising interest rates, the end of lockdowns, and surging inflation made the markets turn against growth stocks in general and tech stocks in particular. Add to that the geopolitical tensions between China and the US, and you have a perfect storm of pain of SMTs portfolio. Both the public parts of the portfolio, which are marked to market, and the private parts, which are reviewed regularly, suffered.
The trusts management remains convinced that its approach is the right one, and is determined to ride out what is perceived as a rough period and nothing more.
Off boarding
James Anderson retired as manager in 2022. This is a cause for concern as he was instrumental in making SMT what it is today. But, succession plans were in place for a long time. Tom Slater has taken over. He was deputy manager to Mr Anderson since 2009 and has been groomed to take over. Mr Slater is assisted by Lawrence Burns, another in-house promotion.
Then there have been board changes. Fiona McBain is stepping down as chair, a role she has held since 2017. A non-executive member, Amar Bhidé, recently attacked the governance at SMT, including singling out the length of time Ms McBain had been in the role of Chairperson and questioning her independence. He also expressed concern that dealing in unlisted securities was risky as the board and company lacked the experience to deal with this. This criticism is strange as it is a little late in arriving if true.
Mr Bhidé has now left the board. Another board member is also retiring.
High-growth portfolio
I am willing to believe that the disruption from the board shake up and the sell-off in the Scottish Mortgage share price is over. Hedge funds have beens scaling back their short positions against SMT, so perhaps that means that they think the worst of this is over too.
There is a lot of good stuff in the portfolio. The positions in Tesla and Alibaba have been trimmed. The highest conviction position is now in Moderna who’s RNA technology was once described as like a software business by James Anderson. The private holdings are not as scary as some might suggest. Stripe, is one of them, and it collected $12bn in revenues in 2021.
This portfolio can now be picked up on the cheap by a patient long-term focused investor who is willing to bear risk. The price of Scottish Mortgage shares are significantly cheaper than the calculated net asset value of the underlying portfolio. In fact right now its at 17% or so. This discount has persisted in varying degrees through the whole of 2022 and into 2023.
Scottish Mortgage Trust share price trend
A discount to NAV is appealing. There is something else I considered before buying this stock for my own portfolio.
The blow up in prices during the pandemic years is all to apparent on a long term chart of the trusts share price. Having COVID winners in the portfolio paid off. But, this was a bubble.
But if we ignore the pandemic price action and fit an exponential (because of the high-growth nature of the portfolio) trend line to the pre-pandemic prices, then something stands out.
The share price of SMT is back to where it should be assuming there is an underlying trend rate of growth that is intrinsic to the portfolio. In fact its a little below where it should be which agrees with the discount seen at this time.
So the straightforward reasons I have for buying Scottish Mortgage Investment Trust shares are:
- They are trading at a significant discount to NAV
- The price of the shares are back in line with the pre-pandemic rate of trend growth
So, assuming the new manager and co-manager can replicate Mr Andersons performance then this seems like a good time to buy. They have been tutored. And much of the portfolio was in place before he left. Lets hope they can do that and the board doesn’t turn itself inside out.
DISCLAIMER: James J. McCombie owns share in Scottish Mortgage Investment Trust. The Storied Investor has no beneficial position in Scottish Mortgage Investment Trust.
The Storied Investor 