Shares in Scottish Mortgage Investment Trust (SMT) are down by one third in value over the past 12 months at 746.6p, having sold off due to the impact of high inflation and rising interest rates on long duration assets including the ‘world’s most exceptional growth companies’ it invests in.

Scottish Mortgage became an investor favourite after delivering a staggering net asset value (NAV) total return of 2,921% between November 2008 and November 2021. But the Baillie Gifford-run trust is now the second worst one-year share price total return performer in the Association of Investment Companies’ Global sector with souring sentiment reflected in a near-12% share price discount to NAV.

Investec Securities has urged clients to ‘sell’ Scottish Mortgage in a research note (19 January 2023), warning the next few months may bring
‘the second leg’ of the sell-off in riskier growth assets. That would be bad news for Scottish Mortgage, whose holdings include gene-sequencer Illumina (ILMN:NASDAQ) and Elon Musk-led
Tesla (TSLA:NASDAQ) and SpaceX, the latter privately owned.

Investec worries Scottish Mortgage’s balance sheet is overstretched, with gearing of 17% at the highest level for a decade. It points out private investment exposure is at full capacity, with the trust currently unable to make follow-on or new investments in this part of the market.

Investec is also concerned the reduction in private company valuations ‘may gather momentum as audited year-end numbers begin to feed through for those funds where there is a valuation lag’, a major risk given that private companies speak for 35.9% of portfolio NAV.

And with central banks struggling to control inflation, the global economy is at risk of tipping into recession with an acceleration in quantitative tightening set to further drain liquidity.

‘Over the next few months, this environment could bring further strong headwinds for Scottish Mortgage’s “growth at unreasonable prices” philosophy, with the manager favouring stocks with growth of an explosive nature,’ says Investec.

Despite such headwinds, Scottish Mortgage’s optimistic managers Tom Slater and Lawrence Burns remain focused on the long-term and are sticking to the trust’s key interests – digitisation of society, the intersection of biology and technology, and the energy transition.

Meanwhile, investment bank Stifel argues the ‘cliff-edge’ in NAVs implied by wide discounts among private equity trusts may be avoided. When the market sees beyond the peak in interest rates, it believes there could be increased buying interest and a sharp rebound in the valuations of funds investing in private equity and mid/small caps.

Also offering some optimism is Wedbush Securities’ Dan Ives, who predicts technology stocks in general will surge about 20% this year, with layoffs across the sector marking ‘the first major step’ toward stabilising this crop of recently struggling stocks.

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