Can Scottish Mortgage survive the tech wreck?

As the former star fund plummets 58% since its peak… Can Scottish Mortgage survive the tech wreck?

The chairman of the largest and best-known investment fund suddenly resigns.

Her exit follows blunt comments from a fellow board member questioning the trust’s managers’ ability to oversee its controversial holdings in private unlisted companies.

Of course, some investors are alarmed by these disagreements — and the sharp fall in the trust’s share price.

But other investors are buying, apparently convinced that this collapse could bring about change in the normally sluggish realm of investment trusts.

This may sound like the plot outline of a Netflix boardroom drama.

But these are some of the latest real-world events at Scottish Mortgage, the FTSE 100 Trust, which, despite the name, doesn’t take center stage on lenders.

The £13.2 billion trust, set up 114 years ago to fund Malaysian rubber plantations, now specializes in innovation and owns stakes in US and Chinese tech giants like Netflix and biotech specialists Illumina and Moderna.

These companies were brought to earth by the end of the near-zero interest rate era. Will their fate end the glory days of Scottish Mortgage, which was among the early backers of Jeff Bezos at Amazon and Elon Musk at Tesla?

Justin Dowley is set to replace Fiona McBain as chair. Will relations between directors and managers become more harmonious and fruitful in the future?

James Carthew of analyst group QuotedData comments: “The board works for investors. You should prioritize answers instead of arguing.’

Scottish Mortgage has been the best performer in the global fiduciary sector over the past decade – up 334 per cent in ten years.

But its share price has fallen 58 per cent from its peak of 1528p in November 2021 and is now at a 19 per cent discount to the net worth of the trust’s assets.

A risky trust should surprise. But as one of the trust’s investors, I would still like more information. The longer the uncertainty lasts, the more comparisons are drawn between Scottish Mortgage and the Woodford fund, which failed on unlisted holdings.

Such analogies may be unfair since, as Scottish Mortgage points out, most of its unlisted interests are not in start-up companies but in major companies. The list includes Tik Tok owner Bytedance, payments group Stripe, and Space X, Elon Musk’s other vehicle.

Such investments used to prove lucrative when companies made their IPOs, but lately there has been little such activity. As calculations by the broker Numis show, there was an average drop in value of 34 percent in the past year for these 92 shares, which make up 30 percent of the portfolio.

Numis argues that directors should make clear their stance on the competence of managers Tom Slater and Lawrence Burns.

The contradictory director Amar Bhide – who has since resigned – also called for a new strategy: “The fact that you have pulled it off in the last ten years is due to a completely abnormal period in financial history. Don’t pretend you can keep playing this game.’

Other analysts are also calling for more accountability, with some seeing the ethos of Baillie Gifford, the Scottish mortgage group, as arrogant or even “cultish”. Scottish Mortgage may not be exposed to the collapsed Silicon Valley Bank. But other Baillie Gifford funds and trusts also hold shares in companies that were clients of the bank.

Against this backdrop, broker JP Morgan Chase didn’t wait for answers, instead downgrading Scottish mortgage stocks. They follow Investec Bank’s Alan Brierley, who declared the shares for sale in January.

Shore Financial Planning’s Ben Yearsley sees the boardroom as a reminder that the era of low interest rates that have so benefitted high-growth companies is over.

This pessimism is not universal. Scottish Mortgage has been the most popular fund on the Interactive Investor platform over the past few days. Given the publicity surrounding the unlisted portion of the portfolio – the contents of which are detailed on the Trust’s website – it’s safe to assume these investors have strong nerves.

I will continue to pour money into Scottish Mortgage as I see this as a test of shareholder democracy. Will the directors realize they work for us? I watch and wait. Can Scottish Mortgage survive the tech wreck?

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