City broker Stifel has warned that popular investment trust Scottish Mortgage might suffer from underperformance in coming years as growth-focused US stocks begin to fall out of favour with markets.
In a research note today, Stifel analysts Iain Scouller and William Crighton said that noted that Scottish Mortgage’s share price has jumped around 27 per cent since early September, thanks to its tech-focused portfolio.
“Whilst the Magnificent Seven stocks were flat to down modestly over the first few weeks of 2025, Scottish Mortgage appeared to get a net asset value boost from strong performance of some of its Asian and Chinese holdings,” noted Scouller and Crighton.
However, the last two weeks have seen its stock price fall 11 per cent back to the level it began at in 2025.
“The price and the market’s enthusiasm for [Scottish Mortgage] tends to overshoot on the way up and undershoot on the way down,” the analysts explained.
While the dip may be simply some investors profit taking and leading to a ‘mild correction’, Stifel has warned that it may be the start of a “significant rotation”
When tech stocks suffer, Scottish Mortgage is usually hit hard. Since the start of the year, only one of the Magnificent Seven stocks has brought in a positive return, with all seven losing an average of six per cent of their value.
Meanwhile, Scottish Mortgage has a high percentage of private companies in its portfolio (27 per cent), with its largest holding, Spacex, making up eight per cent of its net asset value.
This further causes issues for the trust, as the unlisted companies are not easily valued and can increase volatility when concerns begin to arise in the tech sector.
“In the past, when tech-listed stocks were weak, investors worried about valuations,” Scouller and Crighton explained.
Stifel is currently forecasting a downturn in the US economy. Core inflation continues to be stuck at elevated levels, implying little possibility of rate cuts from the Federal Reserve until GDP weakens.
This will lead to more defensive value stocks outperforming, like utilities, healthcare, and professional services, while previous winners like big tech struggle to grab the attention of the market.
“In this scenario, we expect Scottish Mortgage to underperform other global trusts with more balanced portfolios,” said Scouller and Crighton.
Therefore, “the next few weeks ahead of the tax year-end may be a sensible time to top-slice holdings and lock in some considerable gains,” they added.
Scottish Mortgage is very popular with retail investors, frequently topping the most-bought list of investment platforms like Interactive Investor.