Portfolio Adviser - Portfolio Adviser Magazine June 2022
How Scottish Mortgage trust hit unquoteds limit
Kristen McGachey 2022-06-11 12:15:51
● Scottish Mortgage trust went over 30% unquoteds threshold after largest assets hit by share price falls
● New investment will be restricted and closure of IPO windows further limits options for unlisted holdings
Scottish Mortgage Investment Trust’s exposure to unquoted stocks has crept above its investment policy limit after larger listed holdings got caught out in the growth sell-off.
Unlisted stocks represented 24.9% of total assets at the end of March 2022, the £16.9bn trust’s final results revealed, up from 19.5% at the end of its interim period in September 2021.
A handful of private assets were added to the trust during James Anderson’s final year at the helm, including synthetic biology firm Solugen, battery recycler Redwood Materials and online pharmacist Capsule.
The team also participated in several funding rounds for existing unlisted holdings, such as Blockchain.com, Nuro and KSQ Therapeutics.
The level of the trust’s unlisted holdings was also pushed higher thanks to the steep share price falls suffered by its largest holdings, such as Moderna, which experienced a 70% fall from the highs of last year.
After a record 2021, where the trust posted an 112% net asset value (NAV) return, Scottish Mortgage delivered one of its most disappointing yearly performances in recent memory as its preferred growth style of investing fell out of favour.
It suffered a 13.1% decline in NAV during the year, compared with a 12.8% positive return for the FTSE All World Index, while its shares sagged by 9.5%.
The slump continued post-reporting period, with shares down 43% year to date. The decline has pushed the trust above its 30% limit for owning unquoteds, according to US investment bank and financial services firm Jefferies.
It estimates Scottish Mortgage’s unquoted exposure jumped 16% to 28.9% of total assets in the month after the end of the reporting period.
Assuming no further valuation adjustments on the unquoted side, it expects this to have crept up to 30.4%, which is above the trust’s limit.
Though the limit is struck at the time of purchase so does not require remedial action, “it will restrict new investment into unquoteds”, equity analyst Matthew Hose said.
“The current closure of the IPO window exacerbates the problem as there is no ‘throughput’ of unquoted holdings becoming listed,” he continued.
“While the board’s liquidity policy remains in place, share buyback activity has also been limited, as this would further increase the size of the unquoted portion of the portfolio.”
Jefferies still maintains its ‘buy’ rating on the trust, however. While gearing has increased to 16% at the end of April, Hose pointed out there remained “substantial headroom” to the 35% covenant level.
He said: “The impact of the recent marked decline in NAV is evident in both the increase in gearing and in the relative size of the unquoted investments.
“The board and managers’ approach remains focused on the longer term, though.”
IN NUMBERS
1909
Launch year of Scottish Mortgage Investment Trust
£15.1BN
Total assets, as of 30 April 2022
-10.5%
Discount rate, as of 23 May 2022
Source: Baillie Gifford
PEOPLE MOVES
● Columbia Threadneedle is to bid adieu to a fixed income veteran next year after Simon Bond (pictured) announced his retirement. Bond will take a step back from his fund management duties at the end of June having been with the firm for 19 years. Tammie Tang will take over the mandate, having been deputy manager for the past four years.
● Responsible investor CCLA Investment Management has hired Ben Funnell as head of investment solutions. Funnell joins from Man Group, where he was chief equity strategist and then portfolio manager on several equity and multi-asset strategies.
● Odey Asset Management has shed three more partners, with Massey Roborough, Tim Bond and Simon Schafer the latest senior staffers to depart. They join emerging markets manager Rob Marshall-Lee, who left Odey subsidiary business Brook Asset Management after less than a year, and CEO Tim Pearey, who resigned in March after two decades at the firm.
● Tom Messenger has joined Crux Asset Management’s UK equities investment team as an analyst. He will support Richard Penny on the TM Crux UK Special Situations and TM Crux UK Core funds. Messenger was previously an investment analyst at Momentum Investment Solutions & Consulting, which he joined in July 2018.
©Mark Allen Group. View All Articles.