Scottish Mortgage has recovered this year, but is still at its peak. Is now a good time to buy?

Scottish Mortgage was once the go-to fund for UK investors wanting access to high-growth tech stocks.

Its former manager James Anderson, who left in 2022, was known for making a number of successful bets in the technology sector, including Tesla and Amazon.

It remains one of the most privately owned trusts in the UK.

However, since its peak in late 2021 Scottish mortgage shares have fallen more than 40 per cent to 895p as higher interest rates sparked a sell-off in technology shares.

Over the past year, Scottish Mortgage has managed to recoup some of its losses, but it is still trading at a discount.

Could the recent recovery be the start of a new chapter for Scottish Mortgage? Is it a good time to buy?

How has Scottish Mortgage performed over the last year?

Scottish Mortgage was well placed to take advantage of the technology boom during the pandemic.

It reached a high of 1,050 pence in November 2021, but its fortunes changed as interest rates rose and rising inflation caused confidence in the tech industry to sour.

Between 2022 and 2023, the value of its portfolio fell 17.8 percent, while its share price fell 33.5 percent.

The average net asset value (NAV) of the global sector was down 8.2 percent and the share price was down 13.6 percent.

All of this took place against the backdrop of a boardroom dispute over governance and criticism of his monitoring of stakes in unlisted companies.

However, in the last year, Scottish Mortgage has experienced something of a recovery.

In the 12 months to March 31, 2024, its share price rose 33 percent, while its NAV lagged, up 11.5 percent over the same period.

It also increased its dividend by 3.4 per cent in its latest results, meaning it has increased payments for 42 consecutive years.

Scottish Mortgage is asking to be tried over longer periods, due to the nature of its holdings.

In five years, Scottish Mortgage’s net asset value has returned 91.2 per cent, while its share price has returned 78.7 per cent.

In comparison, the FTSE All-World benchmark returned 77 percent.

It vastly outperformed the benchmark index over 10 years, with NAV growing 381.9 percent while its share price rose 358.4 percent.

What has helped Scottish Mortgage recover?

Scottish Mortgage has been trading at a significant discount to its net asset value, but a £1bn share buyback announced in March has helped narrow the discount.

Before the announcement, Scottish Mortgage was trading at a 15 per cent discount, which is now 7.78 per cent.

Alex Watts, fund analyst at ii, said: “The narrowing of the discount over the period was a strong driver of returns, although the trust continued to trade at a discount throughout the year.”

Jason Hollands, CEO of Bestinvest, highlights the news that activist Elliott Management has amassed a discloseable stake of more than 5 per cent.

This “has added to the sentiment that sentiment was a potential turning point and it is notable that both the discount has narrowed sharply to -7.8 per cent, and that Elliott has reduced its position recently.”

Elsewhere, Scottish Mortgage has been boosted by the better performance of its key holdings, such as chipmaker Nvidia, which has soared 177 percent in the last year.

Senior manager Tom Slater said: “Demand for Nvidia chips has far exceeded expectations, which has been a major driver of our returns.”

Slater and his team have also increased their stake in Amazon, which is up 50 per cent over the year, and has regained its position as one of the trust’s largest holdings.

“If AI revolutionizes the way we buy products, it is likely to favor Amazon, the company with the most consumer data and the vast physical infrastructure to get products to those consumers,” Slater said.

Deputy Director Lawrence Burns has stressed how “profound and immeasurable” artificial intelligence will be.

The portfolio changes mean it is now heavily invested in AI, but that means if there is a slowdown in the sector it could impact the value of Scottish Mortgage’s holdings.

Is it a good time to invest in Scottish Mortgage?

The shift towards AI-focused holdings is likely to spark interest from potential investors, especially following Nvidia’s successful sales, which should help boost Scottish Mortgage.

However, there is a risk that “confidence will also be very exposed if AI stocks ever lose steam,” Hollands warns.

‘There is also some potential built into the unlisted portfolio if IPOs start to pick up at some point.

‘One of the largest unlisted companies is Elon Musk’s SpaceX, which is reportedly considering a stock sale that would value the company at $200 billion. Such a valuation would provide a boost to Scottish Mortgage’s net asset value.’

The trust’s unlisted holdings have proven controversial throughout the year, but Scottish Mortgage continues to invest in Elon Musk’s SpaceX, TikTok owner ByteDance and fintech company Stripe, among others.

These unlisted assets represent more than a quarter of the trust’s portfolio.

Unlike listed stocks, whose prices change in real time, these private companies have their prices changed every three months, so they carry risks.

Recent results showed that average valuations of unlisted shares rose 9 per cent over the year, lagging the NAV increase of 11.5 per cent of the total portfolio over the same period.

Is it a good time for investors to take a chance on Scottish Mortgage again?

Hollands says that while it is unlikely that investors will be able to purchase shares at a deep discount, “the ongoing share buyback program should prove very supportive for some time yet.”

Laith Khalaf, head of investment research at AJ Bell, says: “Scottish Mortgage remains a high-octane investment proposition that is only suitable for investors with a long time horizon and a patient, adventurous approach.”