Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Is Scottish Mortgage Investment Trust a double-edged sword?

Scottish Mortgage Investment Trust allows retail investors a rare chance to invest in privately held companies. But over-exposure to tech stocks and pre-market failures means volatility is inevitable.

Scottish Mortgage Investment Trust (LON: SMT) is one of the only investment trusts in the FTSE 100. But as a misnomer, it’s ‘global rather than Scottish and has nothing whatsoever to do with mortgages.’

Instead, it invests in shares of companies alongside other assets to deliver long-term results. And with a current Net Asset Value of 1,225p, against a share price of 1,215p, it’s currently trading at a 0.8% discount to its constituent assets. This can indicate a bearish short-term sentiment towards its investments.

But Scottish Mortgage doesn’t care for the short-term, instead aiming ‘to achieve a greater return than the FTSE All-World Index (in sterling terms) over a five-year rolling period.’ And to date, it’s up 248% in this time frame, excluding dividends, while the low-risk index has increased a mere 7%.

And while volatile, it was a stellar performer during the early days of the covid-19 pandemic. After dipping to 520p on 20 March 2020, it soared 168% to 1,393p by 12 February 2021. It then fell to 1,017p on 5 March 2021, before hitting a record 1,543p in early November.

But it’s caught clothing on a bramble, falling 28% to 1,221p today. But the trust expects this level of volatility, warning would-be investors that ‘we look to add value over five-year time frames, preferably much longer.’ On this metric, it has clearly overperformed.

Scottish Mortgage: private investments

But after 22 years as fund co-manager, James Anderson is stepping down in April after 22 years. Chairman Fiona McBain believes Anderson’s decision to invest up to 30% of its holdings in private companies was ‘one of the trust’s most important strategic initiatives to date.’ This sets Scottish Mortgage apart for retail investors, as investing in the trust is one of the few ways to gain significant exposure to non-listed companies.

And it’s exceptionally good at identifying disruptive innovators years before they go public. It invested early in China’s Alibaba, and in Spotify three years before its $30 billion IPO. Similarly, it invested in fintech stock Wise in 2016, five years before its £8 billion direct listing.

And its portfolio includes ‘49 private companies, which in aggregate accounted for 19.2% of total assets.’ This scattergun approach gives it a much higher chance to pick a winner. Moreover, private companies don’t need to grow too quickly to appease shareholder demands for rapid returns. This can mean better long-term decisions with less outside interference.

And the investment trust has £22.75 billion of assets under management with proven results. It can conduct research in far more detail than any individual investor and has the financial firepower to hold stocks through periods of significant volatility. Of course, past success is no future guarantee. And as private companies often choose to keep their financials under wraps, Scottish Mortgage investors are forced to trust in management decisions.

Scottish Mortgage: doubled-edged sword

And the investment trust can spot undervalued disruptors in the public sphere as well, investing in Tesla for $6 a share back in 2013. This decision ultimately allowed it into the consecrated hall of the FTSE 100 four years later. Anderson believed that ‘Tesla was already past the technological and practical challenges…what we needed was time. Not many investors can have that luxury.’ Also investing in NIO before it launched its IPO, Scottish Mortgage was able to wait for the EV revolution to explode.

But all its top 10 holdings, 44.1% of its portfolio, are in tech stocks. And this reliance on the sector is a key source of its volatility. The other is its use of gearing; borrowing additional funds that can magnify gains and losses.

Tech stocks have sky-high valuations based on their ability to grow using cheap debt. But in the US, the Federal Reserve is increasing its tapering rate and has signalled interest rate rises are imminent. In China, the Evergrande crisis continues to unfold.

Its top holding Moderna is worth 10.5% of its portfolio. And while the Biotech stock is up over 1,000% in two years, it’s also fallen 25% in the past month. Many of the trust’s other investments have experienced recent similar falls.

Scottish Mortgage Investment Trust is for the long-term faithful, with a healthy appetite for risk, and a willingness to hold through choppy waters. But as monetary policy tightens, investors might find that taking big risks cuts both ways.

Trade over 16,000 international shares from zero commission with us, the UK’s No.1 trading provider.* Learn more about trading shares with us, or open an account to get started today.

*Based on revenue excluding FX (published financial statements, June 2020).

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Act on share opportunities today

Go long or short on thousands of international stocks with spread bets and CFDs.

  • Get full exposure for a comparatively small deposit
  • Trade on spreads from just 0.1%
  • Get greater order book visibility with direct market access

See opportunity on a stock?

Try a risk-free trade in your demo account, and see whether you’re on to something.

  • Log in to your demo
  • Take your position
  • See whether your hunch pays off

See opportunity on a stock?

Don’t miss your chance – upgrade to a live account to take advantage.

  • Trade a huge range of popular stocks
  • Analyse and deal seamlessly on fast, intuitive charts
  • See and react to breaking news in-platform

See opportunity on a stock?

Don’t miss your chance. Log in to take advantage while conditions prevail.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Sunday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of spread betting and CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.