This Fund Owns SpaceX, Moderna, and ByteDance. Buy It at a Discount.

It initially made convertible bond investments in rubber plantations in British Malaya as a play on the nascent auto industry. A hundred years later, it was an early investor in
Tesla
(TSLA). Its mission: “identify, own, and support the world’s most exceptional growth companies.”

Scottish Mortgage has an impressive long-term record, returning 15% annually over the past 10 years, three percentage points better than the
S&P 500.
But it has suffered in the past 18 months with the selloffs in Tesla,
Amazon.com
(AMZN),
Moderna
(MRNA), and other holdings.

The fund’s shares, now trading at a 23% discount to net asset value, look appealing as a play on a recovery in Baillie Gifford’s investments—public and private—and a potential narrowing in the discount.

The fund also carries a low annual fee of about 0.3% annually, way below the average of actively managed U.S. open and closed-end funds. The fee is also much lower than that of another big overseas closed-end fund, Bill Ackman’s $10 billion
Pershing Square Holdings
(PSH.NA), which charges 1.5% annually and a 16% incentive fee on gains above its high-water mark.

Scottish Mortgage’s top five holdings on April 30 were Moderna, Dutch semiconductor producer
ASML Holding
(ASML), Tesla, Latin America e-commerce play
MercadoLibre
(MELI), and Elon Musk’s private SpaceX. Those five stocks represent about 30% of the global portfolio, with U.S. investments accounting for about 60% of its total holdings.

The main impediment for U.S. investors is that the fund is domiciled in the U.K. and the shares are traded in sterling on the London Stock Exchange, with a recent price of about 620 pence. The fund, technically an independent trust, is a member of the benchmark
FTSE 100 index.
For U.S. investors, it is taxed as a passive foreign investment company.

The fund’s share price was hit hard during the Nasdaq rout, declining 46% in 2022. The U.K. shares are down nearly 60% from their Nov. 1, 2021, peak of about 1,500 pence. The discount has widened from about 5% a year ago. U.S. investors can purchase the U.K. shares, or buy the lightly traded OTC Markets shares at around $8 apiece under the ticker STMZF.

Why the big discount? A key issue is the value of the private portfolio, which makes up about 30% of the fund’s holdings and includes SpaceX, battery maker Northvolt, Stripe, and TikTok parent ByteDance. The fund’s 12% leverage magnifies returns.

Edinburgh-based Baillie Gifford, which manages $289 billion, says on its website that it pursues a rigorous process for evaluating its private investments and that the average private investment was written down by 34% in calendar 2022, in line with the drop in the Nasdaq.

Longtime manager James Anderson, a former member of the Barron’s Roundtable, retired last year and the fund is now headed by Tom Slater.

Slater acknowledged in his semiannual shareholder letter released this week that the Scottish Mortgage Investment Trust’s recent performance has been “painful” for investors. “But history shows that periods of poor performance are inevitable. Our approach will never be consistently in favour, and we should not deviate from it to avoid short-term headwinds.”

Ackman’s Pershing Square fund trades at an even bigger 30%-plus discount to its NAV. But Scottish Mortgage offers a low-fee play on a group of big-cap growth stocks and private investments that would be tough for individual investors to access.

Write to Andrew Bary at [email protected]