Questor: Scottish Mortgage – bubble beneficiary or the perfect fund for patient investors?

When Jack Ma pushes the button on a reported $35bn (£27bn) share sale by Ant Group any day now, the Alibaba tycoon does so in the knowledge that the flotation of his fintech offshoot could be a record breaker.

With a mooted $250bn valuation from a dual listing in Hong Kong and Shanghai, the forthcoming debut of the Chinese loans and payments firm stands as a reminder that in a grim year for the global economy some parts of the stock market are still partying.

Ant follows hot on the heels of Snowflake, the cloud data firm whose first day on Wall Street this month saw its shares more than double even though they had been priced well above their expected range. A third prospect, Palantir Technologies, a data analytics firm that works for intelligence agencies, begins trading on Tuesday.

Investors are witnessing either the remarkable advance of a new generation of high-growth, high-potential stock market stars or a fresh technology boom whose disconnection from recessionary reality cannot go on forever.

This range of possible opinions lies at the heart of whether one listed fund, which these three firms have in common as an investor, is the perfect way for private shareholders to gain exposure to tomorrow’s biggest success stories – or a vehicle that risks a costly correction.

Scottish Mortgage investment trust has had another impressive year: its share price rise so far, 68pc, puts it higher up the FTSE 100 list than Aviva, NatWest or Next. Since we tipped it here in May 2018 it has gained 100pc and over five years its value has risen almost fourfold, thanks largely to sizeable holdings in Amazon, Alibaba and Tencent.

Its largest investment, Tesla, the electric carmaker, has soared in value but is volatile. At 14.3pc of the portfolio at the end of August even after some selling, it would make sense to offload more.

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Many of the internet “platform” giants that the trust has favoured looked richly valued before the coronavirus lockdown but they have only prospered further as consumers’ lifestyles have digitised and as growth hunters have flocked in.

With their minimum five-year view, Scottish Mortgage’s managers, James Anderson and Tom Slater of Baillie Gifford, the Edinburgh-based fund manager, show signs of being more selective in this area.

Sold last year were stakes in Baidu, the Chinese search company, and Grubhub, the US food delivery firm, followed by the disposal in June of the last of the trust’s Facebook holding amid concerns that the social media behemoth was spending too much time firefighting on various fronts rather than focusing on the next growth opportunity.

Scottish Mortgage’s track record of spotting the latter has granted it a rarefied place among a set of smart, patient investors sought out by private companies, such as Meituan Dianping, a Chinese food delivery firm that transports 30m meals a day. Its founder flew to Edinburgh to seek advice on building a company that would last for a century.

Of course, not everything the trust backs shoots up. Within a portfolio that includes life sciences firms and a smattering of luxury goods businesses there are several bets that have gone backwards.

But because private companies are staying private for longer, getting in early – often via existing relationships – is vital to capturing the potential for explosive gains. This is why Scottish Mortgage sought and was granted shareholder approval this summer to raise the limit on unlisted assets in its portfolio from 25pc to 30pc.

The thought of a great collection of unlisted assets will give any investor who went through the Neil Woodford debacle nasty flashbacks but this trust takes small stakes in expanding firms rather than vast chunks that are difficult to pass on.

The shares typically trade at a small premium to net asset value but have recently been dipping below, suggesting some bubble fears. To rate them as a sell given their great gains would be to fall into the short-termism trap that Messrs Anderson and Slater have so successfully avoided.

But to recommend Scottish Mortgage as a buy at this juncture would seem a bold move too. Questor readers may choose to bank some profits but should continue holding.

Questor says: hold

Ticker: SMT

Share price at close: 974.5p

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