Sell Scottish Mortgage, top City broker tells investors

Scottish Mortgage Investment Trust, one of Britain’s biggest funds, has been downgraded to “sell” by the influential broker Investec after it suffered one of the worst years in its 113-year history.

In a research note for clients published today, Investec said it believed the £11bn investment trust was “vulnerable to a sharp correction in the coming months” and warned of “significant” risks facing its assets.

Scottish Mortgage, the flagship fund of the venerable Scottish investment partnership of Baillie Gifford, offers investors exposure to growth stocks in the US and China such as Amazon, Apple and Alibaba. It is the second-largest fund in Britain by total assets and has returned almost 70pc to shareholders over the past five years.

Alan Brierley of Investec, co-author of the research note, told the Telegraph: “I have covered investment trusts since the early 1990s and cannot ever remember having a negative recommendation on the stock [Scottish Mortgage].”

One of Investec’s concerns was the trust’s high level of borrowing or “gearing”, which is now 17pc, significantly above the fund’s 10pc target and its highest level for a decade. Investec said this represented a clear risk given the fund’s exposure to private investments, which represent 35.9pc of its net asset value. Such investments would not be easy to sell.

The broker also said it was concerned about a “valuation lag” between late-stage venture capital investments and similar listed companies. It said it expected a reduction in the valuations of Scottish Mortgage’s private investments to “gather momentum” over the coming year.

Investec said that while the global economy faced recessionary risks, Scottish Mortgage would continue to struggle thanks to its preference for stocks with “explosive” growth.

Ewan Lovett-Turner of Numis, another broker, said it had been a “very difficult time” for Scottish Mortgage and its shareholders since its peak in 2021 as tough economic headwinds triggered the technology selloff. The fund’s focus on growth stocks cost it dearly in 2022 as it lost huge sums in holdings such as Tesla and Spotify.

But Mr Lovett-Turner said he was comforted by the fund’s “robust” approach to valuing private investments. “I think Scottish Mortgage is still worthy of an allocation because it has arguably the most active approach to valuations of unlisted companies among its peers,” he said.

A third of its unlisted companies are reviewed by the fund every month, Mr Lovett Turner added, and a “huge number of adjustments” to valuations had been made over the past 18 months.

Baillie Gifford has been approached for comment.