The Scottish Mortgage Investment Trust has lost its coveted gold star rating from Morningstar due to gearing costs.
James Anderson’s £9.2bn investment trust has a low ongoing charge of 0.36%, but the representative cost of holding the trust is 0.77% once the cost of gearing is taken into account.
Morningstar has therefore reduced its rating on the investment trust to a silver under its overhaul of its ratings framework. Analyst Robert Starkey said the 0.77% cost of investing is not as attractive as the OCF but remains attractive nonetheless due to the portfolio’s exposure to unlisted assets.
Starkey was positive on a number of other factors, such as the longevity of tenure of fund managers Anderson (pictured) and Tom Slater. The former has been manager since 2000 while the latter joined as deputy in 2009 before being promoted to co-manager in 2015.
He described performance as “standout”, noting Scottish Mortgage has outperformed its category index over the short, medium and long term. But he added: “Investors, however, can expect these returns to come with substantial volatility and need to take a long-term view.”
The Morningstar downgrade follows an analyst note issued from Stifel this month arguing Scottish Mortgage shareholders should consider locking in gains after the investment trust’s stellar performance during the coronavirus pandemic.
However, while Stifel described Scottish Mortgage as a core holding in its analyst note, Morningstar has said it should play a supporting role in portfolios. Starkey said: “While the strategy nominally provides exposure to global equities, investors should be cognisant that the highly active nature of the management, the inclusion of unlisted investments, structural gearing and a relatively concentrated portfolio, are likely to lead to a bumpy ride at times. This should be a long-term investment and part of a wider diversified portfolio.”
