There has been a lot of news flow around Scottish Mortgage Investment Trust (LSE: SMT) recently. I think most investors have been focusing on the public companies it holds. And rightly so since this makes up the vast majority of the portfolio.
But I think investors may be missing a trick and overlooking the trust’s private companies or unquoted holdings. This is what I’m focusing on and it’s one of the reasons why I’d buy Scottish Mortgage Investment Trust in my portfolio.
Unquoted holdings: an overview
Approximately 17% of the trust is invested in private companies. In fact, the portfolio has 48 unquoted holdings. Tech is overall a big theme, so I’m not surprised to see a tech bias in this portion of the trust as well.
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The fund managers have successfully managed to identify and invest in some early-stage tech companies before they float on the stock market. Some examples include Snowflake and Palantir Technologies.
It’s been a key strategy that so far has paid off. But I don’t think it has been by fluke. In fact, I’m impressed that the fund managers have managed to consistently and successfully take small stakes in early-stage companies. To me, it’s one of the qualities that makes a great investor.
Recent fears
The recent tech sell-off in the stock market has affected the trust’s public holdings. But it has meant that some investors are also questioning the valuations of the unquoted holdings.
In April 2020, Scottish Mortgage Investment Trust took the prudent approach and announced that it had cut the value of its unquoted investments. This was in response to the coronavirus stock market crash. The tech sell-off has somewhat subsided, but if it happens again I think the unquoted holdings could be thrust into the limelight once more.
This comes at a time when James Anderson, one of the investment brains behind the trust, has announced his retirement. I’ve mentioned this before, but I’m not worried about this change in leadership. Baillie Gifford, the asset manager behind the Scottish Mortgage Investment Trust, has a good track record when a fund manager hands over the baton to their successor.
Success so far
Two unquoted holdings that the trust is invested in are Stripe and Epic Games. Both private companies have been making headlines due to their phenomenal valuations.
Stripe, the global payments processor, received a record $95bn valuation. This comes after it recently raised $600m from a range of investors including Scottish Mortgage Investment Trust. I reckon Stripe could go public, which would mean it’s another unquoted success for the trust.
Epic Games, the private company behind the worldwide hit video game Fortnite, recently received a $28bn valuation. To me this is further evidence that the fund managers have successfully identified growth opportunities in unquoted investments.
Of course past performance is not an indication of future results. Unquoted investments are risky and not for the faint hearted. Private companies are typically at the early stages of their business life and so a lot could go wrong.
But what I like about the Scottish Mortgage Investment Trust is that the risk of unquoted companies is somewhat cushioned with the larger portfolio of public holdings. This is why I’d buy the trust in my portfolio.
