Is Scottish Mortgage Overvalued Amid a Tech Sell-Off and Political Uncertainty?

The Scottish Mortgage Investment Trust (SMT) has long been a poster child for high-conviction growth investing. Managed by Baillie Gifford, the fund's strategy of backing disruptive, high-growth companies has historically outperformed benchmarks, even as it navigates the turbulence of a tech sell-off and a shifting political landscape. But as the fund trades at a 9.58% discount to its net asset value (NAV) as of June 2025, the question arises: Is this discount a sign of undervaluation, or does it reflect a market that has lost patience with its long-term thesis?

Discount Dynamics: A Window of Opportunity or a Warning Signal?

SMT's discount to NAV has fluctuated wildly in recent years, peaking at 22.8% in 2023 before narrowing to 9.6% by April 2025. This discount, while still significant, represents a potential buying opportunity for investors who believe in the fund's ability to outperform its benchmark. The discount is partly a function of market sentiment—growth stocks, particularly in tech, have faced headwinds as interest rates remain elevated and investors rotate into more defensive assets. However, SMT's active management has mitigated some of these risks.

The fund's board has executed a £1.71 billion share buyback program since March 2024, reducing the discount by nearly half. This move signals confidence in the underlying portfolio and aligns with the fund's long-term strategy of compounding value for shareholders. The buybacks also create a floor for the share price, as repurchasing undervalued shares enhances returns for remaining investors.

Valuation Realism: Metrics Suggest Caution, Not Panic

SMT's valuation metrics—price-to-earnings (P/E) of 11.43 and price-to-book (P/B) of 1.02—appear modest compared to its high-growth peers. However, these metrics can be misleading for a closed-end fund with a significant private portfolio. The fund's NAV, which includes unlisted holdings like SpaceX and Databricks, is a more accurate reflection of its intrinsic value.

The fund's 12-month average discount of -10.46% suggests that the current 9.58% discount is within historical norms, albeit on the higher side. This implies that the market is not entirely dismissing the fund's prospects but is pricing in near-term volatility. For investors with a multi-year horizon, the discount could be a compelling entry point, especially given the fund's track record of outperforming the FTSE All-World Index by a wide margin.

Strategic Risk Rebalancing: Navigating the Storm

SMT's managers have demonstrated discipline in rebalancing the portfolio to address overvaluation and political uncertainty. For instance, they reduced their stake in Tesla by 73% since 2023 after its valuation surged without corresponding operational progress. Similarly, they trimmed NVIDIA holdings, anticipating the commoditization of AI hardware. These moves reflect a shift from speculative bets to more resilient positions.

Geographic diversification has also been a key focus. While the fund remains heavily invested in U.S. tech, it has expanded into China (BYD, Meituan) and emerging markets (Mercadolibre, Nubank) to hedge against geopolitical risks. The private portfolio, which includes stakes in SpaceX, ByteDance, and Stripe, further insulates the fund from public market volatility.

The Political Uncertainty Factor

The U.S. political landscape under a new administration has introduced regulatory uncertainty, particularly in sectors like AI, cryptocurrency, and space exploration. SMT has responded by favoring companies with strong cost controls and operational efficiency, such as Meta and Amazon, while maintaining exposure to disruptive innovators like SpaceX. This balance between resilience and growth ensures the portfolio remains adaptable to policy shifts.

Investment Implications

For investors, the key question is whether the current discount reflects a temporary market correction or a fundamental reassessment of SMT's strategy. The fund's active management, diversified portfolio, and buyback program suggest the former. While the tech sell-off has dented its performance, the fund's long-term focus on disruptive innovation positions it to capitalize on the next wave of growth.

However, caution is warranted. The fund's beta of 0.79 indicates it is less volatile than the broader market, but its exposure to high-growth sectors means it remains susceptible to macroeconomic shocks. Investors should monitor the discount's trajectory and the fund's ability to execute its rebalancing strategy.

Conclusion: A Buy for the Patient Investor

Scottish Mortgage is not overvalued—it is, in fact, trading at a discount to its intrinsic value. The fund's strategic rebalancing, disciplined capital allocation, and focus on long-term growth make it an attractive proposition for investors who can stomach short-term volatility. While the tech sell-off and political uncertainty have created headwinds, they also present opportunities for SMT to acquire undervalued assets and strengthen its portfolio.

For those with a five-year horizon, the current discount offers a compelling entry point. The fund's managers have proven their ability to adapt to changing conditions, and their commitment to compounding value through buybacks and strategic adjustments reinforces this thesis. In a world where patience is a rare virtue, Scottish Mortgage remains a testament to the rewards of a long-term, high-conviction approach.