Is now the time to pounce on Scottish Mortgage and Fundsmith?

Some of the country’s biggest and most popular investment funds have seen sharp price falls this year. It has caused many to wonder whether they should sell these big investment beasts, take profits and seek alternative homes for their money. 

On the other hand, many are contemplating whether now is a good time to buy these long-established funds ‘on the cheap’. 

Wealth editor Jeff Prestridge asks some of the UK’s leading investment experts what investors should do. Stick, twist, or be brave and buy? 

SCOTTISH MORTGAGE 

Sscottish Mortgage is the country’s biggest investment trust. It is listed on the UK stock market, a constituent of the FTSE 100 Index, and has assets valued at more than £11billion. 

Managed by Edinburgh-based investment house Baillie Gifford, it has made big profits for tens of thousands of investors over the years by investing in a mix of global technology stocks – the likes of Amazon – and startups. In total, it has more than 100 holdings. 

But with the rise in interest rates in the US, increased global geopolitical tensions, and China’s economy restrained by severe Covid lockdowns, Scottish Mortgage’s shares have taken a hammering. Since the start of the year, they have fallen in value by more than 38 per cent, though longer term the performance still looks good. Over five years, the shares are still up more than 90 per cent. 

Baillie Gifford is at pains to state that the trust is for long-term investors only. Many of its investments are in unlisted companies – nearly 30 per cent of the portfolio – and there is no guarantee these will prove profitable. 

It also has big stakes in major Chinese tech companies such as Tencent and Alibaba, which have seen their share price hit by a regulatory crackdown initiated by the Chinese government. US tech stocks have also seen their share prices fall back sharply. For example, shares in Amazon (a top ten holding) have slid 26 per cent this year. Some 70 per cent of Scottish Mortgage’s portfolio is invested in Chinese or US companies, most with a tech bent. High risk. 

Baillie Gifford is sanguine about the trust’s recent performance, stressing that long-term investing ‘requires the ability to endure periods of intense discomfort’. 

It’s a message most investment experts are keen to emphasise. Laith Khalaf, head of investment analysis at wealth platform AJ Bell, describes the trust as ‘high octane’, saying existing investors should ‘consider sticking with it’, provided they are comfortable with the risky nature of its portfolio. But he adds: ‘It’s essential investors have a longterm investment horizon.’ 

He is cautious about recommending the trust as a ‘buy’. He says: ‘The share price fall this year of 38 per cent has been breathtaking. And potential investors should understand things may get worse before they get better. 

‘The tech sell-off which has adversely affected this trust may not yet have run its course.’ 

Investment platform Interactive Investor takes a more positive view. It includes Scottish Mortgage in its list of top 60 funds that investors should look to buy. 

Although the trust’s inclusion on the ‘super 60’ list was reviewed early last year – a result of longstanding manager James Anderson announcing he was standing down – Interactive retained Scottish Mortgage. The view was that the fund’s pursuit of ‘exciting opportunities with significant growth potential’ would not be compromised by management change. 

Despite the fund’s precipitous price fall, the shares are still trading above the level when Interactive decided to stick with its buy recommendation (£7.95 versus £6.39 back in late April last year). 

Tracy Zhao, senior fund analyst at Interactive, admits the trust’s performance since its share price high in November last year (above £15) has been ‘a real party stopper’. She says it will continue to face headwinds, so investors should only buy shares if they are prepared to take a five- to ten-year time horizon. 

Dan Lane, senior analyst at stockbroker Freetrade, says Scottish Mortgage’s investment process – built around investments in listed firms and stakes in private businesses – has been proven to work over many years. And he sees no reason why this blending of public and private equity cannot continue to be successful, saying: ‘It’s Scottish Mortgage’s bread and butter.’ 

Yet Lane says that anyone buying shares would be wise to dilute the risk by also looking to buy shares in trusts where capital preservation is the overriding aim. Such funds include stock market-listed Personal Assets and Ruffer. 

‘The rocky road isn’t over for trusts such as Scottish Mortgage,’ he says. ‘So investors need capital preservation as much as a lust for investment opportunity.’ 

Kate Marshall, investment analyst at financial services firm Hargreaves Lansdown, says the fact the trust’s shares are trading at a 7 per cent discount to the value of the portfolio’s assets could be seen as a buying opportunity. Yet she says investors should tread carefully, adding: ‘This trust could continue to underperform if higher inflation and interest rates persist.’ 

Of all the experts canvassed by Wealth, FundExpert’s Brian Dennehy is the most pessimistic about Scottish Mortgage’s prospects. He says: ‘I see no reason to buy this trust, perhaps not for years.’ 

Dennehy’s view is that the low interest rate environment which has prevailed since the 2008 financial crisis is over. As a result, equities will look increasingly unattractive against other financial assets, while the valuation of many tech stocks that Scottish Mortgage is invested in will continue to fall in recognition of a more challenging economic backdrop. 

In recent days, the chief executive of US investment bank JPMorgan Chase has warned of an impending economic ‘hurricane’ in response to rising commodity prices and higher inflation. He also talked of the risk of further stock market volatility. 

WEALTH VIEW: Only buy Scottish Mortgage shares if your investment time horizon is at least five years, preferably ten. And rather than invest in one go, stagger your purchases over about six months, thereby protecting yourself against further share price falls. 

Existing investors with locked-in profits could crystallise some of these gains, using the proceeds to invest in lower risk funds.

FUNDSMITH EQUITY 

Fundsmith Equity is a £23.7billion fund run by Terry Smith, acknowledged by rivals and experts alike as one of the finest investment managers of his generation. 

The performance figures for Fundsmith Equity are striking. Since the global fund’s launch in late 2010, annual investment returns average 16.2 per cent. Over the same period, the MSCI World Index has generated annual returns of 11.8 per cent. 

Yet the fund has had a difficult year, though nowhere near as challenging as that faced by the managers of Scottish Mortgage. It has seen losses of 15.2 per cent this year. 

Smith’s modus operandi is to invest in a tight portfolio of highquality businesses. They are often market leaders, have a technological advantage that is hard to replicate, and are cash-generative. 

The result is a portfolio of 28 companies, many of which have brands familiar to UK investors. Among its top ten holdings are US drinks giant Pepsico, tobacco giant Philip Morris and cosmetic companies L’Oreal and Estee Lauder. 

Smith’s focus on market leaders has also led to big stakes in Microsoft and Amazon – tech shares caught up in the sell-off of US growth stocks in recent months. 

Since the start of the year, their respective share prices have fallen by 18 and 26 per cent. Over the same period, other key holdings such as Estee Lauder and software company Intuit have seen share price falls of about 30 per cent. 

Smith is unfazed, insisting the fund is chock-a-block with ‘high quality, resilient, global growth companies that are good value and which we intend to hold for a long time, and in which we invest our own money’.

AJ Bell’s Laith Khalaf says it is inconceivable many Fundsmith Equity investors would be thinking of jumping ship. He says: ‘The basic principle of buying good companies and holding them for nearly ever is an enduring one that should deliver over the long term.’ 

He adds: ‘There’s certainly no reason to drop this fund at the current juncture, but it’s imperative that at all times investors maintain a portfolio of funds with different investment styles, however good one individual manager might be.’ 

Ben Yearsley, investment director at Shore Planning, says Fundsmith Equity’s investment process is ‘tried and tested and works’. 

WEALTH VIEW: Buy, but like Scottish Mortgage stagger your purchases over the coming months. Existing investors should hang on. 

All investors should be aware the Financial Conduct Authority has asked Fundsmith (the wider investment company, not the fund) to review its operations, as revealed by The Mail on Sunday. The terms of such a review prevent Fundsmith from commenting on it.

OTHER BIG BEASTS 

A number of other popular big beast investment funds have suffered sharp price falls since the turn of the year. 

They include F&C, the country’s oldest investment trust and a £4.4billion global fund (down 12 per cent), £2.6billion tech trust Polar Capital Technology (down nearly 30 per cent) and £3.5billion investment fund Baillie Gifford American (down 45 per cent). 

Dennehy says F&C offers ‘nothing of consequence’ and lots of ‘inherent mediocrity’. In the trust’s defence, it has 51 years of annual dividend growth under its belt. 

Yearsley says anyone who holds both Baillie Gifford American and Scottish Mortgage are doubling up on similar investment styles – investing in growth companies. 

‘Only hold one,’ he counsels. It’s a view shared by AJ Bell’s Khalaf, who says Scottish Mortgage is a better option because of its broader global investment remit. 

Hargreaves Lansdown’s Marshall says Polar Capital Technology will continue to underperform as long as inflation rages. 

But long term, it could represent a sound choice for anyone seeking specific exposure to technology.