I do not have the best track record of buying into boom or bust opportunities. Cryptocurrency? Missed out on it. GameStop? Passed me by.
One that is creeping into too-good-to-be-true territory is investment trust Scottish Mortgage, which has taken a hammering in recent years.
Indeed, the trust has been the worst performer in the IT Global sector over 12 months and the second worst over three years, making a 23.7% loss over the shorter timeframe and 21.9% loss over the latter.
Yet it remains popular with investors. According to data from AJ Bell, it was the most bought investment trust through the fund supermarket during the first half of the year. The same was true for customers of rival fund shop interactive investor.
There are reasons why the trust remains so well backed, the most obvious being its long-term returns. Over 10 years it has trounced the rest of the IT Global sector, even given its woeful past year, making 319.6%.
Another – and far more topical reason – is its discount, which has widened substantially over the past year. Investors can now pick up the trust’s shares at an 18.9% discount – a level that has been unheard of for much of the past decade.
In more recent history, over the past five years the trust has traded more at a premium – or at a very narrow discount – than it has a double-digit discount.
But does this make it cheap? I am not convinced.
Around 28.2% of the trust is invested in private equity, with the remainder in listed companies. If we look at the IT Private Equity sector for a gauge of the average discount applied to the high-risk, illiquid asset class, the average trust in the sector is on a discount of 31.5%.
This includes behemoth portfolio 3i, which is on a premium of 5.7% (as at the end of June – the most recent data on FE Analytics) and brings in the discount by 2 percentage points.
Turning to the remaining 71.8% invested in quoted global stocks, the average discount among IT Global trusts (excluding Scottish Mortgage) is 10.7%.
So, assuming a 31.5% discount to the private equity portion of the trust and a 10.7% reduction to the listed part, the data suggests Scottish Mortgage’s shares should be valued around 16.5% below the net asset value.
While this is under the 18.9% current premium, it is hardly the spectacular re-rating many investors will surely be after.
Does this mean the discount won’t go back to par, or even a premium? Hindsight is 20:20 and we will only know the answer to that in the coming years.
I have never bought the trust myself – a mistake for much of the past decade I admit – but nor am I tempted into it now. If I were to look to add risk to my portfolio, I would take the punt on a private equity trust.
Despite its premium, 3i has made 646.7% over 10 years and is up 58.4% over one year – it surely has to be a consideration. For discount chasers, I like the HarbourVest Global Private Equity trust, which has made 277.2% over the decade, but has come under pressure over the past year.
Investors can pick shares up 43% below their net asset value presently and at that price it is a long-term option I am looking at for my ISA, even if it does not fit with my usual style of investing.