Scottish Mortgage has started off 2022 with a buy rating from Stifel despite falling 15% in the first two weeks of the year.
In an analyst note published this week, the research house took a favourable view of the unlisted bucket in its portfolio and suggested investors drip-fee money into the investment trust while it sits at a lower price. The note was published just before the investment trust’s announcement it had issued $400m of debt.
Scottish Mortgage’s share price peaked at 1,544p at the start of November but fell 26% to 1,141p on 14 January with its 6% premium falling to a 4% discount.
“None of us know when the growth stock de-rating will reach the low point, but taking a contrarian view, the shares are starting to look interesting,” Stifel said. “Given the volatile nature of the portfolio, we suggest ‘drip-feed’ investing – there is clearly a risk the rotation from growth continues for some time, with the price consequently falling.”
It updated its rating from neutral to positive.
‘We think the unlisteds may actually provide some stability’
Although Stifel acknowledged the view unlisteds may take a hit during periods of market dislocation, it argued Scottish Mortgage’s portfolio could provide some “ballast” when listed valuations are volatile.
“Assuming we are not seeing a 1999/2000 style tech stock bust, when a key problem was loss-making companies running out of funding, we think the unlisteds may actually provide some stability during this period of market volatility for growth stocks,” said Stifel’s analysts.
The fact that Scottish Mortgage revalued a third of its unlisteds each month meant the portfolio was less at risk of “cliff-edge” declines that might be seen in private equity funds that use stale valuations that reach up to six months old before being updated.
Unlisted investments currently account for around 20% of the portfolio, a figure that has remained unchanged for the last 18 months. Social media company ByteDance has overtaken Ant as the largest unlisted investment, representing 1.8% of total assets.
Scottish Mortgage could ramp up info provided on unquoted investments
Although Stifel views the unlisted portfolio favourably it suggested Scottish Mortgage could improve the information it provides to shareholders about these investments.
It said it would like to see more data on overall performance, commentary around major changes in valuations, information on outstanding commitments, details on the stake Scottish Mortgage holds in unlisted companies, plus updates to shareholders when the net asset value of unlisted companies are revalued, both via monthly factsheets and through RNS announcements.
Additionally, Stifel noted there was no material commentary on the performance of the unlisted portfolio as a whole in the accounts on an annual basis. “We do think there is a missed opportunity to highlight the benefits accruing to Scottish Mortgage shareholders from the unlisted portfolio – a segment of the market which many other investment trusts are just unable to access, even if they wished to,” Stifel said.
