Morningstar analysts have downgraded Baillie Gifford’s high-flying Scottish Mortgage Investment Trust plc — which has returned 58% so far this year — from a gold rating to a silver rating on cost grounds “following changes to the way that funds are rated.”
Scottish Mortgage is a member of the FTSE 100 and is the flagship fund of Edinburgh-based investment giant Baillie Gifford, which has assets under management and advice of more than £260 billion.
Scottish Mortgage itself has assets of £14.5 billion and its share price has soared 58% so far this year to give the closed-end fund a current stock market valuation of around £13.2 billion.
Morningstar said that under its “enhanced ratings framework” analysts are putting a greater emphasis on fund fees.
It said that while the trust’s annual charge is low at 0.36%, the additional cost of Scottish Mortgage’s gearing (borrowing) “makes its price less competitive.”
Further, Morningstar analyst Robert Starkey said: “The inclusion of unlisted investments, structural gearing and a relatively concentrated portfolio, are likely to lead to a bumpy ride at times.
“This trust should be a long-term investment and part of a wider, diversified portfolio.”
A Baillie Gifford spokesman said: “We are disappointed that cost of debt is now included in their analysis without accounting for the actual returns produced from the borrowing.
“Scottish Mortgage will continue to employ strategic gearing, in the belief that low-cost borrowing invested into carefully selected equities will benefit shareholders in the long term.
“Scottish Mortgage remains committed to providing shareholders with low fees and is unique in doing so for a portfolio that provides access to established private companies.”
Over five years, Scottish Mortgage’s net asset value (NAV) total return grew 124.6% and its share price total return grew 123.5%, compared to the 41.5% of the FTSE All-World index, the 69.1% of the investment trust global sector average NAV total return, and the 68.4% of the investment trust global sector average in share price total return.
The investment trust’s top holding is Tesla, accounting for 11.1% of its portfolio, followed by Amazon, which accounts for 9.3% of assets, according to Morningstar data.
Almost 17% of the portfolio is in Chinese stocks including internet giants Tencent and Alibaba.
Among its unlisted holdings are Elon Musk’s aerospace business SpaceX and home-sharing app AirBnb.
Morningstar analysts said: “An ongoing charge of 0.36% is offset when the cost of debt is considered, pushing the representative cost up to 0.77%.
“This is not as attractive as the management fee alone, although it is still attractive given the access the trust offers to unquoted assets.”
Scottish Mortgage, which previously held a Gold Morningstar Analyst rating, has been downgraded to Silver.
Starkey said: “Scottish Mortgage Trust continues to deliver on its unique mandate …
“The combination of a best-in-class team with a well-executed process awards the strategy a rating of Silver.”
Morningstar said Scottish Mortgage’s strong returns do not come without some risk.
It said the fund’s managers are allowed to invest up to 30% of the trust’s assets in unlisted companies — a limit which was raised from 25%.
Starkey said: “The management believes that many companies are able to perform better away from the intraday spotlight of quoted markets, where investors and management are increasingly focused on quarterly figures to the detriment of longer-term investment and growth.”
Meanwhile, analysts at Stifel produced a note saying Scottish Mortgage investors should consider locking in gains after the investment trust’s strong recent performance.
Stifel said Tesla and Amazon are among the standout performers for Scottish Mortgage this year, delivering 442% and 71% respectively in the year to August 17.
It noted that for the 10 years to March 31, the NAV (net asset value) of Scottish Mortgage had returned 361% compared to the 128% returns of the FTSE World Index.
“Taking into account the gains that have been made and the increased weighting many portfolios will have in Scottish Mortgage shares following their relative outperformance, compared to other equities, we believe that banking some profits could be a contrarian but prudent course of action,” said the Stifel analysts.