I think it’s fair to say that Schiehallion Fund (LSE: MNTN) isn’t a household name. Yet with a market cap of £720m, this under-the-radar investment trust is fairly large. Unfortunately, after plummeting 60% in the last two years, this holding isn’t as valuable as it once was in my SIPP.
The shares are now trading at a massive 41% discount to the net asset value (NAV) of the fund. And they’re down 75% since late 2021.
So, should I double down on this underperforming holding? Let’s discuss.
What is this strangely named fund?
Schiehallion Fund is run by asset manager Baillie Gifford and named after the mountain in Scotland.
Launched in 2019, it invests in later-stage private businesses that the managers think have the potential to become publicly traded. These are high-growth and potentially world-changing companies.
Unusually however, the fund doesn’t cash in once these firms go public. Instead, it holds on to them in an attempt to capture even more value for shareholders.
For example, it carried on backing fintech companies Wise and Affirm after each had its initial public offering (IPO).
The portfolio
Schiehallion’s largest unlisted holdings include rocket pioneer SpaceX, TikTok owner ByteDance, and Epic Games, the company behind the blockbuster video game Fortnite.
Then there’s Northvolt, the Swedish electric vehicle battery maker, and Stripe, which processes payments online.
These are some of the world’s most exciting private companies. And if they went public today, most would be large enough to be near the top of the FTSE 100. So I like that this isn’t a portfolio chock-a-block with risky start-ups.
The problem, however, is accurately valuing these private companies. Investors have become fearful that they’d be worth less in the open public market. Hence why the shares have been marked down.
Further headwinds
The fund’s value peaked in late 2021, then cratered as interest rates marched higher in a bid to combat rising inflation.
Higher rates pose challenges for growth firms by increasing borrowing costs, reducing the present value of future earnings, and making other assets more attractive than stocks.
Another potential issue I’d highlight here is that the shares are denominated in US dollars. Each share is currently $0.72. So there could be exchange rate risk, depending on how the currencies perform.
It could be a hidden gem
Overall though, I think there’s an attractive opportunity here. The value of the fund should head higher once some of its holdings go public. And that could start happening soon.
For example, reports say Northvolt, which was founded by former Tesla executives in 2017, is planning to list this year at a valuation of around $20bn. That would give a boost to the fund’s underlying valuation.
Moreover, interest rates seem to have peaked and are set to start coming down. So I think that could help boost sentiment around growth companies and also help the shares recover.
Finally, I’d note that Baillie Gifford values each holding at least once per quarter, with outside help by S&P. Therefore, I do think the valuation process is robust.
On balance, I really like the risk-reward set-up here. I get to invest in some of the world’s most exciting private companies at a massive 41% discount. I’d happily buy more shares with spare cash.
