SMT in The Times25 May 2022 10:37
https://stocks.apple.com/AVJ8DKtYcR3ygOxULrDHDKg
Risks are high but so are the rewards at Scottish Mortgage Investment Trust
Emma Powell, The Times, May 25 2022
Believers in Scottish Mortgage Investment Trust need to maintain their faith more than most right now. The wind has turned against the FTSE 100 constituent, precipitating a share price fall far greater in magnitude than those at the start of 2020 or during the 2008 financial crisis.
A regulatory clampdown on Chinese technology companies and the prospect of more aggressive interest rate rises by the US Federal Reserve have caused a sell-off in the growth stocks that make up the trust’s largest holdings. Its net asset value shrank by 14 per cent over the 12 months to the end of March, a dramatic reversal from the 111 per cent expansion in the previous year.
Indeed, the shares have fallen further than the value of the trust’s holdings, which means a rare discount has opened up since the start of this year, now at almost 11 per cent. The question today is whether investors have the appetite to withstand a further decline in the share price in the immediate term, in the hope of a revival of the returns it has delivered in the past.
Scottish Mortgage, Baillie Gifford’s best-known investment trust, has made its name as an early backer of companies that it reckons have high growth potential, including an initial stake in Amazon in 2004 and Tesla in 2013. Such bets take time to be proved right, or indeed wrong, which means that even the fund’s own managers discourage those that aren’t willing to park their cash for at least five years from buying in. Long-term investing “requires the ability to endure periods of intense discomfort”, Lawrence Burns, deputy manager, has told investors. He and Tom Slater, the fund’s lead manager, stepped up to run it when James Anderson left in April after 22 years with the trust.
Rising rates will continue to make re-rating difficult for American technology stocks such as Amazon and Tesla. The belief that tighter regulation would prove more of a blow to such companies in the West than in the East has proved a costly bet. Chinese groups including Alibaba, the ecommerce giant, and Meituan, the food delivery company, sapped the most juice out of the fund after suffering falls in value of more than 40 per cent in the year to March.
Underestimating the pace and scale of regulatory change that could occur in China and cutting holdings in western technology stocks over their Chinese counterparts was a mistake, the managers have conceded, but that is not an indication of any intention to reduce Chinese exposure. Will the fund be bitten twice, or more? That depends on whether you believe that the worst of the regulatory crackdown is behind us; the threat of US sanctions is already accounted for in much-reduced stock valuations, and structural growth areas such as ecommerce don’t reverse.
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