Scottish Mortgage’s growing exposure to unlisted businesses has been scrutinised by Stifel as shareholders in the investment trust prepare to vote on a resolution to increased portfolio limits on unquoteds from 25% to 30%.
In a research note published ahead of Thursday’s AGM Stifel said it expected shareholders to vote in favour of the change, pointing out that unquoteds have increasingly played a key role in the portfolio.
“The unlisted portfolio continues to become a more significant part of Scottish Mortgage’s portfolio and potentially returns,” it said. “The performance of the unlisted segment of the portfolio as a whole appears to have been relatively good in the past year at around +11% and this is similar to the performance of the NAV of the rest of the portfolio over the year at +13.7%.”
In the £11.5bn trust’s annual report managers James Anderson and Tom Slater said the change in investment policy would give them more flexibility to invest in the best opportunities as they come instead of having to wait for existing unlisted holdings to IPO.
Scottish Mortgage unquoted exposure has ‘grown rapidly’
The proportion of unlisted assets in the trust has “grown rapidly” in recent years, Stifel noted. At the end of March 2020 unlisted holdings accounted for 20% of total assets, up substantially from five years ago when unquoteds made up just 4% of the portfolio.
Chinese firm Ant Financial is currently the largest unquoted position in the portfolio with a weighting of 2.3%, and the trust also counts Elon Musk’s private aerospace company SpaceX (0.6%) and Airbnb (0.2%) among its biggest private holdings.
Stifel said it was pleased to see in Scottish Mortgage’s last set of full accounts that 21 out of 59 of its holdings that were originally purchased as unlisteds had delivered annualised returns above 10%.
The strongest performer Vir Biotechnology has generated an annualised return of 114.6% since it was added to the portfolio in 2017, while five holdings, including workplace messaging tool Slack Technologies and Chinese e-commerce giant Alibaba, have returned over 40% on an annualised basis.
But there have been some misses, with 22 unlisted investments delivering negative returns. Intarcia Therapeutics, which makes up 0.1% of NAV, has seen a 46% annualised decline in valuation, while Uptake Technologies and Eventbrite have fallen 31% and 24% respectively.
In the year to 30 May 2020 Scottish Mortgage has returned 48% on a NAV basis compared to the FTSE World Index, up just 8%.
Transparency on investment trust’s unquoted holdings needs improvement
Stifel also pointed out there was still room for improvement around the level of disclosure on the trust’s unlisted holdings. In particular it said it would be useful to have data on overall performance and specific commentary around major changes in valuation as well as information around outstanding funding commitments to private holdings.
“We do realise that for unlisted companies there does tend to be greater sensitivity around financial information and in some cases ‘non-disclosure agreements’ (NDA’s),” the research group said.
“However, we do think that much of the information suggested above is fairly basic for private equity investments. Whilst each individual unlisted investment is not material to the overall Scottish Mortgage portfolio at this stage, we do think investors would appreciate greater disclosure.”
However it said “Scottish Mortgage and Baillie Gifford are well positioned to invest in unlisteds” due to its long-term view “which suits growing unlisted companies,” and added that the trust’s closed-ended structure is beneficial from a liquidity and duration standpoint.
It also pointed to Baillie Gifford’s “unparalleled access” to many unlisted opportunities as another thing working in its favour.
“The Scottish Mortgage team are also able to access companies which generally would be impossible for many other investors to have the opportunity to invest in,” Stifel said. “Scottish Mortgage is not just allocating a portion of its portfolio to ‘general venture-capital’ investments. Instead the emphasis is on specialist investments that few others can access.”
