Fiona McBain, chair of popular investment trust Scottish Mortgage (SMT), is stepping down after a boardroom row over corporate governance exploded into the public arena.

In a board update (21 March), Baillie Gifford’s flagship fund said senior independent director Justin Dowley will succeed McBain as chair as a result of ‘succession planning’, though her exit has clearly been hastened by a bust-up between the board and non-executive director Amar Bhide, who has now left the board and is no longer a director.

Bhide told the Financial Times (17 March) that Scottish Mortgage asked him to resign at a recent board meeting after he clashed with McBain over the appointment of new board members. Regarding the FTSE 100 fund’s unquoted investments, he argued ‘they do not have the capabilities and governance clout to be able to monitor the illiquid investments on which there is little audited information in the public sphere’.

The Times reported further comments from Bhide that there has been ‘a long series of procedural violations’ that were ‘brushed aside’
at Scottish Mortgage.

Scottish Mortgage’s unquoted exposure is an area facing ‘understandable scrutiny’ according to Numis. As of 28 February 2023, 29.9% of the portfolio was in 52 private investments, up from 19% at September 2021 and 25% at March 2022 and marginally below the 30% limit.

Numis notes this limit is ‘based on the percentage at the time of investment, which is crucial to avoid the fund having to be a forced
seller of private assets due to movements in the value of public holdings, which could significantly destroy value’.

The broker says this ‘does limit the scope for new investment in unquoteds, which could lead the fund to miss out on follow-on opportunities or suffer some dilution if it was unable to back
a down-round’.

Given the complexities of investment in private companies, Stifel thinks it would help if Scottish Mortgage appointed a specific manager to deal with that segment of the portfolio.

Scottish Mortgage’s shares have fallen by roughly a third over the past year to 664.2p to leave them languishing on a near-20% discount to net asset value (NAV). Sentiment has soured due to the impact of rising interest rates on the ‘world’s most exceptional growth companies’ it favours, such as biotech firm Moderna (MRNA:NASDAQ) and Elon Musk-led Tesla (TSLA:NASDAQ).

Scottish Mortgage has an excellent long-run track record. Over the last 10 years the trust has produced NAV and share price total returns of 421% and 362% respectively versus 183% from the FTSE All World Index (total return). However, given this period coincided with near zero interest rates, the question is whether it can sustain its performance in a higher rate environment.

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