Scottish Mortgage: should I stay or should I go now?   

Investors in the country’s largest investment trust, Scottish Mortgage, have had a stellar ride, but last week’s big sell-off could be a sign of things to come.

With assets under management of nearly £15bn, Scottish Mortgage (LON:SMT) is by far and away the largest investment trust and it has also been one of the most successful. Over the last ten years the fund has delivered a share price return of almost 700%, which is impressive however you look at it.

Last week was a lot more challenging, however, with the tech-heavy portfolio losing around 12%. This prompted lots of speculation over the weekend about whether the technology bull market is finally coming to an end, although in early trade on Monday the shares had bounced back about five percent.

An amazing success story

Scottish Mortgage is managed by James Anderson and Tom Slater of Baillie Gifford. They have an unconstrained approach and invest globally in companies that have strong long-term growth prospects, which has certainly been the place to be for the last decade or so.

SMT has become synonymous with its large tech weightings that have helped it to make such superb returns. At the end of July the fund’s biggest holdings included Tesla (13.4%) and Amazon (9.7%), as well as the Chinese tech stocks Tencent (5.9%) and Alibaba (5.4%).

Perhaps less well known is the fact that it can hold up to 30% of its assets in unlisted investments, and at the end of July these holdings accounted for 16% of the portfolio. The managers believe that many of the best opportunities are becoming listed at a much later stage in their development than they used to, which makes this a highly profitable area to target.

Boom or bust?

Baillie Gifford is a strong believer in electric car maker Tesla and has recently had to cut back its stake after the huge rally in its share price pushed the holding above concentration thresholds. It is thought that the firm has made a profit of about £12bn from this one holding across all of its funds with the aggregate position now reduced from 7.6% to 4.25%.

Tesla divides opinion with staunch supporters like Baillie Gifford on one side and bears like our own Simon Cawkwell on the other. There is no doubt that the bulls have won the battle so far, but last week’s tech sell-off could be a sign of things to come and if Tesla implodes it is going to take funds like Scottish Mortgage down with it.

It has recently been suggested that a lot of the froth in the tech space is due to Japan’s SoftBank supposedly buying billions of dollars in individual stock options over the last month. Any kind of nervousness that sees the hot money withdrawn could bring about a major reversal.

It feels to me like a lot of cash has found its way into Tesla and the wider tech space in general because it has been the only game in town, which makes it a dangerous place to be. If you have made money out of Scottish Mortgage, it might be prudent to take some profits off the table and re-invest them elsewhere.