Since I bought Scottish Mortgage (LSE: SMT) shares a few months ago, I’ve been pleased with their performance. But by one measure, the share price has since fallen to a 20% discount. Should I take this rare chance to buy shares even cheaper?
Big discount?
What’s tempting me is the recent change in Net Asset Value. In simple terms, the NAV of a fund is how much it costs to buy in compared to how much the company holds.
For example, if a fund owned only £1m in Rolls-Royce shares but could be bought for £900,000, that’s a 10% discount on NAV. Of course, this is oversimplified. In reality, investment funds tend to have a lot of moving parts.
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For Scottish Mortgage, the fund’s owner Baillie Gifford publishes the data on its website here. Right now, a share costs 666p, but the “NAV at fair price” is 836p. That’s a 20.3% discount, in theory at least.
In one sense, it’s a no-brainer to buy in for 20% off. I’d expect investors to be jumping in with both feet until the price goes up again. So why haven’t they?
Why it’s cheap
The issue for Scottish Mortgage is in the breakdown of its holdings. While 70% are public stocks, easy to value as they have a market price, about 30% are private investments, ones not traded on the open stock market.
In itself, this isn’t a bad thing. One of these private investments is Elon Musk’s SpaceX, which I suspect would do very well in a public offering. I like that my shares give me exposure to the exciting space exploration firm.
The problem is that private companies like SpaceX have no market price. That means 30% of Scottish Mortgage’s holdings are hard to assess, and we have to take management’s word on how much they are worth. The risk is that the fund hasn’t got its valuations right, and there are a few smoking guns.
One was the recent boardroom bust-up. Amir Bhide, a director who has since left the boardroom, criticised the firm’s strategy around its unlisted holdings. His criticisms went so far he reported the fund to the Financial Conduct Authority.
One analyst agreed when calling a ‘sell’ recommendation on Scottish Mortgage, saying: “Ultimately, though, there will be price discovery, and for many this may be brutal.” This kind of evidence shows the 20% ‘discount’ might not be quite as attractive as it first appears.
Am I buying?
There’s a lot of uncertainty here, and it seems clear that there’s more to the discount on NAV than meets the eye, enough to put me off increasing my position. Still, I like the fund and what it focuses on. I’ll hold my shares for now, and I may pick up more once the dust has settled.
