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Scottish Mortgage Investment Trust: 2023 review

Investors looking for stable returns may have heard of Scottish Mortgage Investment Trust, which has risen to prominence in the market in recent years. Explore the potential of Scottish Mortgage Investment Trust within your global investment trusts portfolio.

The Scottish Mortgage Investment Trust has been around since 1909, making it a veteran in the world of finance.

This trust, managed by Baillie Gifford, a highly regarded investment management firm recognized for its innovative techniques, has regularly outperformed its peers and produced exceptional returns for its investors.

At least, it has in the past. Since the start of 2022, shares of the Scottish Mortgage Investment Trust have dropped by 45 percent.

In this article, we will look closely at Scottish Mortgage Investment Trust, what makes it appealing to financial backers, its recent performance, as well as its potential to bounce back and outperform the market in the future.

This article is for informational purposes only and is not intended to replace the services of a financial advisor. Seek the counsel of a reliable financial consultant or counselor to ensure that your decisions will help you achieve your objectives.

If you want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.

What is Scottish Mortgage Investment Trust?

In 1909, at the height of the rubber boom, which was caused by an increase in consumer demand for tires, Scottish Mortgage Investment Trust was established.

It did not take long for the company’s founders, Carlyle Gifford and Colonel Augustus Baillie, to shift their focus to international investments.

Four years after the trust was established, it was renamed the Scottish Mortgage and Trust Company Limited. Since then, the name of the trust has been the source of some misunderstanding.

One of the most successful moves in Scottish Mortgage’s history was the trust’s return to the United States in the 1950s under the leadership of investment manager (and eventually chairman) George Chiene.

By 1969, the trust’s gross assets had increased to £54 million, and it had combined with two other trusts managed by Baillie Gifford: Second Scottish Mortgage and Scottish Capital. This enabled the ‘new’ Scottish Mortgage to surpass the £100 million mark in terms of its total value.

The Scottish Mortgage Investment Trust is a trust that is actively managed and has a proven track record over the long term.

Tom Slater and Lawrence Burns, who currently manage the fund, have a strong conviction strategy, and they can invest up to thirty percent of the portfolio in businesses that are not publicly traded. Both are currently in charge of managing the trust after James Anderson stepped down from those responsibilities in April 2022.

The Scottish Mortgage Investment Trust has a long history of making investments around the world in the pursuit of robust companies offering returns that are significantly higher than average.

Holdings in rapidly expanding economies such as China and Brazil are examples of how the trust’s investments continue to reflect the global nature of the trust itself. As of the end of September 2021, the trust has around £19.5 billion worth of total net assets.

How is it performing recently?

Scottish Mortgage Investment Trust has a long and illustrious history, which it has built upon and developed further over the course of the years, in order to become the investing powerhouse that it is today.

The trust has a proven track record of long-term global investing and holds holdings in economies that are experiencing rapid expansion.

However, after ten years of returns that were significantly higher than the market average, it became a prime example of what happens when the market turns against growth stocks.

Since the beginning of 2022, the trust’s shares have dropped by 45%. In the meantime, the discount that the trust is trading at relative to its underlying net asset value (NAV) has ballooned to a 10-year high of 22%.

These losses have caused the trust to lose most of the gains it made during the years 2020 and 2021, although the performance of the trust over the long run is still outstanding.

Scottish Mortgage Investment Trust is a growth-oriented investment trust that makes investments in the world's most successful growing firms, regardless of whether or not those companies are publicly traded.
Scottish Mortgage Investment Trust is a growth-oriented investment trust that makes investments in the world’s most successful growing firms, regardless of whether or not those companies are publicly traded.

The net asset value of the trust has increased by 74.5% over the previous five years, which compares to a growth of 57.3% for the FTSE All-World Index. In comparison, the FTSE All-World Index increased by 179.2% over the same time period, while the NAV increased by 399%.

In spite of the trust’s performance over the past year, the approach that it employs has not shifted.

It maintains its investments in the world’s most successful growing companies, irrespective of whether or not they are publicly traded.

Sadly, recent trends in the industry have moved away from favoring this strategy. Investors have become increasingly concerned about the valuation of private companies over the past two years, which is something that Scottish Mortgage, which has a substantial portfolio of private investments, is well aware of.

Currently, private equity accounts for thirty percent of the portfolio, which is quite near to the maximum allowed. The majority of the holdings are somewhat modest, but nine of them are ranked among its top 30, such as Northvolt (3.6%), SpaceX (3.2%), and ByteDance, which is the company that owns TikTok (2.2%).

The corporation reevaluated its private assets 532 times in the past year, and 84% of those holdings were reevaluated five times or more. On average, company valuations were reduced by 28% as a result of these reevaluations.

Despite this, the fact that the trust is trading at a discount to its NAV implies that investors are still wary of the values underneath.

The trust has outperformed over the past decade by concentrating on firms that will be successful in the future and by maintaining its holdings in these investments regardless of market conditions.

Along the way, there will be some people who are unsuccessful, but over the course of time, the winners will far outweigh the unsuccessful.

What else should you know about Scottish Mortgage Investment Trust?

Over the course of the previous two decades, Scottish Mortgage Investment Trust has owned 700 different businesses. Tom Slater, who is a co-manager of the fund, claims that a percentage of less than 5 percent is responsible for “all” of the returns.

During the release of the trust’s full-year earnings, Slater and his co-manager Lawrence Burns addressed the shareholders and asked them to maintain “discipline and patience.”

The two individuals elaborated that “the accelerating pace of change throughout the economy… has not translated into our investment results as of late, but we need to remain disciplined and patient.”

The co-managers of the private portfolio defended the strategy by stating that it provides shareholders with low-cost access to companies “many of which have no public market equivalent.”

This was in response to the fundamental problem with the private portfolio. As a result of the trend toward companies maintaining their private status for extended periods of time, the private portfolio also provides “a lens into the future.”

The administrators also defended the trust’s “robust valuations process” and pointed out that the trust’s top private assets are industry heavyweights worth multiple billions of dollars.

“The companies that make up the bulk of our private company exposure are consequently neither small nor early-stage,” noted Burns.

“This is because these companies have already achieved significant scale.” This leads one to believe that they are less likely to be negatively affected by the “material change in the funding environment… from a period of capital abundance to one of capital scarcity.”

Additionally, the management issued a word of caution, saying that “it is likely that a few of our smaller private company holdings may find themselves to be casualties of this new environment.”

In the event that this takes place, we anticipate that the resulting impact will be negligible in terms of the portfolio’s total assets.

Even while the public portfolio of Scottish Mortgage is simpler to evaluate, even this segment was subject to significant headwinds in 2022.

Despite this, the management resisted the urge to make any significant changes to the organization. Alibaba, a major player in the Chinese technology industry, was the only one of its top assets to be sold. When Alibaba was still a private company, Scottish Mortgage made its initial purchase of the holding in 2012.

Following a period of ten years, the trust made the decision to reconsider its position in order to address “concerns about the growth of big online platform companies in China after several regulatory interventions, as well as reflecting disquiet about the deteriorating Sino-US relations.”

Additionally, an investment in Illumina was reduced in size. Despite the fact that this gene-sequencing company may yet have a significant part to play in the development of future medical care, its “execution has been disappointing.”

In addition, a new holding was acquired in the gaming firm Roblox, a holding was expanded in the cloud networking provider Cloudflare, and a holding was expanded in the Latin American ecommerce and finance company MercadoLibre. All of these transactions took place in the past year.

The returns of Scottish Mortgage illustrate that growth investment is not a simple strategy, and that it is possible to experience times of great returns followed by periods of losses and extreme unpredictability. The question that needs to be answered by the shareholders is whether or not the trust will recover.

Should you invest in Scottish Mortgage Investment Trust?

There is no straightforward response to this. As investors shy away from growth-at-any-price stocks, growth investing may face challenges for some time.

There is some evidence that growth equities perform better during times of declining interest rates, but they suffer during times when interest rates are rising. Value stocks, on the other hand, typically behave in the opposite manner.

But there is no getting around the fact that Scottish Mortgage owns some of the most fascinating and cutting-edge businesses on the entire planet.

Taking into consideration the performance of the trust in the past, it continues to be one of the most appealing alternatives for investors to acquire a stake in these enterprises.

What should you look for in an investment trust fund?

If you are on the fence, here are a few things to keep in mind when picking a trust fund to invest in.

Analyze the trust fund’s track record of success, taking into account its returns over varying time frames and its reliability in generating gains. Funds that have routinely beaten their respective benchmarks are ones to consider.

Study the background and success rate of the fund manager. The fund’s performance is very sensitive to the competence and expertise of the manager.

However, given that it is a growth-oriented investment trust, it is possible that investors who prefer a lower level of risk should avoid Scottish Mortgage. Before making any decisions about any type of investment, it is critical to conduct one's own study and get the opinion of a financial specialist.
However, given that it is a growth-oriented investment trust, it is possible that investors who prefer a lower level of risk should avoid Scottish Mortgage. Before making any decisions about any type of investment, it is critical to conduct one’s own study and get the opinion of a financial specialist.

The trust fund’s investing plan should be also be familiar to you. Does the level of risk appeal to your investment strategy? Think about whether the fund invests primarily in a certain industry, area, or type of asset.

Examine the trust fund’s portfolio to see how diversified it is. A fund’s risk of concentration in a particular investment or industry is mitigated when it is broadly diversified.

Think about what you will have to pay to put money into the trust. You should consider the fund’s cost-effectiveness because high fees can reduce your investment returns over time.

Look for funds that have solid procedures in place for managing risks. Risks need to be tracked and countered in order to keep investors’ money safe.

Also, it is good for a fund to maintain open communication with the public by reporting its holdings, performance, and other pertinent data on a consistent basis.

Think about the size and liquidity of the trust fund. It is possible that larger funds have more money and stability, but smaller ones have more leeway and growth possibilities.

Always do your homework and talk to a financial expert before putting your money somewhere.

Final thoughts

Scottish Mortgage Investment Trust is a growth-oriented investment trust that makes investments in the world’s most successful growing firms, regardless of whether or not those companies are publicly traded.

The trust’s approach has remained the same over the course of the past year, and it will continue to make investments in the world’s most successful growth companies, irrespective of whether or not they are publicly traded.

The net asset value of the trust has increased by 74.5% over the previous five years, which compares to a growth of 57.3% for the FTSE All-World Index. In comparison to the FTSE All-World Index’s growth of 179.2% over the same time period, the NAV has increased by 399%.

In spite of the recent decline, Scottish Mortgage could still deserve a spot in the portfolios of investors based on a few reasons.

The fact that it focuses on long-term growth drivers sets it apart from practically all other investment strategies. While they acknowledge that this may be unsettling during times of uncertainty, they believe that it has the potential to offer an excellent return over the course of time.

The Scottish Mortgage Investment trust is a trust that is actively managed and boasts an impressively successful track record over the long term.

Tom Slater and Lawrence Burns, who manage the fund, have a strong conviction strategy, and they can invest up to thirty percent of the portfolio in businesses that are not publicly traded.

Keeping this in mind, investors who are willing to take on less risk might not be a good fit for the Scottish Mortgage Investment trust.

The trust utilizes strategic gearing, which has the potential to increase returns throughout the trust’s entire investment horizon.

However, it is important to keep in mind that this can make the market even more volatile when conditions are already challenging.

In normal market conditions, the maximum exposure to equities as a percentage of shareholders’ funds is normally set at 120%. Except in very unusual circumstances, the maximum amount of debt that can be taken on is 30 percent.

After years of outstanding results, the trust’s shares have dropped, and investors are becoming concerned about high-risk equities.

Nevertheless, there are industry professionals who continue to have faith in the leadership and who believe that SMT is in a strong position to expand and reward long-term investors.

The share price of Scottish Mortgage has been on a discount of approximately 20%, which some investors view as an opportunity to buy the stock.

In general, Scottish Mortgage Investment Trust has a solid track record over the course of a lengthy period of time and invests in some of the most intriguing and inventive businesses on the entire planet.

However, given that it is a growth-oriented investment trust, it is possible that investors who prefer a lower level of risk should avoid it. Before making any decisions about any type of investment, it is critical to conduct one’s own study and get the opinion of a financial specialist.

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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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