Scottish Mortgage Trust Posts Lackluster Interim Performance Amid Unlisted Asset Decline

Highlights:

• Unlisted Investments Drag Down NAV: Decline in unlisted holdings led to a significant reduction in Scottish Mortgage Trust’s net asset value (NAV).
• Lack of Clarity on Capital Returns: Stifel criticized the absence of a clear update on the trust’s capital return strategy despite surpassing its buyback target.
• NAV Supported by Market Gains: Recent recovery in US and Chinese equities provided a boost to the trust’s NAV since the end of September.

Scottish Mortgage Investment Trust PLC (LSE:SMT) delivered a lackluster interim performance, according to analysts at Stifel, as the FTSE 100-listed fund grappled with setbacks in its unlisted investments. Stifel's analysis revealed a decline in the value of these private holdings by an average of 11.3%, which led to a 3% drop in the trust’s net asset value (NAV) over the period.

Unlisted Investments Weigh Heavily on NAV

The trust, known for its bold strategy of mixing publicly traded stocks with private equity investments, saw its NAV rise by just 1.9% since March when accounting for debt at fair value. In comparison, the FTSE All-World Index posted a total return increase of 3.6%, underscoring the relative underperformance of Scottish Mortgage Trust against the broader market.

Stifel highlighted the challenges posed by the trust’s exposure to unlisted assets, which have become a drag on overall performance. The broker pointed out that these private investments are inherently riskier and tend to be less liquid, making them vulnerable to market downturns.

Lack of Transparency on Capital Return Strategy

Another point of contention raised by Stifel was the absence of a detailed update on Scottish Mortgage Trust’s capital return plans. Despite exceeding its £1 billion buyback target set for the two years ending March, the trust has not provided clear guidance on the future of its capital allocation strategy. This lack of transparency has left investors in the dark, particularly as the discount on SMT shares has widened in recent months.

“The board has engaged with multiple shareholders on this matter, revealing mixed opinions regarding the balance between continuing buybacks, reducing debt, and making new investments,” Stifel noted in its report. “While the buyback programme is set to continue, no specific target figure has been disclosed.”

Positive Momentum From US and Chinese Markets

Looking ahead, Stifel noted a promising rise of approximately 7% in the trust’s NAV since the end of September, supported by strong gains in the US and Chinese markets. These recent rebounds could provide some relief to investors, though concerns about the trust’s unlisted holdings and overall capital strategy persist.

Scottish Mortgage Investment Trust remains focused on high-growth sectors, with significant investments in both listed and private companies, particularly those in the technology and innovation space. This strategy has made the trust a favorite among investors seeking exposure to cutting-edge industries, but it also introduces volatility, especially in times of market uncertainty.

Outlook Remains Uncertain

While the recent uplift in NAV is a positive sign, the trust’s overall outlook remains clouded by broader market trends and its exposure to high-risk private equity investments. As the management navigates these challenges, investors will be closely watching the upcoming updates, particularly regarding any changes to the capital return strategy and adjustments in the unlisted portfolio.

On Friday, SMT shares edged down by 0.3%, reflecting the market’s cautious sentiment. The trust’s performance in the coming quarters will likely hinge on its ability to address shareholder concerns and capitalize on its investments in both the public and private markets.