FTSE 100 member Scottish Mortgage Investment Trust (LSE: SMT) has absolutely smashed the performance of the aforementioned index since the start of 2020. Its share price is now 55% higher than where it was in January. The FTSE 100, in sharp contrast, is down almost 20%.
Why is this and, importantly, can it last?
Why is SMT outperforming?
That’s easy. In line with its strategy of buying companies offering “the best potential durable growth opportunities for the future,” SMT’s portfolio is made up of some of the biggest tech stocks on the planet. Think online giants Amazon and movie streaming service Netflix. Both have thrived in recent months, thanks to the lockdown.
By far SMT’s best performer, however, has been electric vehicle hot stock Tesla. Its share price is up 250% since the start of the year, making it the trust’s largest holding.
Aside from its stellar performance, investors in SMT also benefit from a relatively low ongoing charge of just 0.36%. Passively tracking an index like the FTSE 100 via an exchange-traded fund might be even cheaper. But it would be hard to argue that managers James Anderson and Tom Slater don’t offer value for money compared to other professional investors.
The FTSE 100’s underperformance isn’t hard to explain either. In contrast to SMT, some of its largest constituents are oil and companies, banks, insurance firms, and airlines. You don’t need me to tell you that none of these have done well in 2020.
Can it continue?
Here’s where things get a bit tricky. The fact SMT holds some of the most ‘loved’ (hyped) stocks in the world is clearly a blessing right now. However, it could prove a burden if market sentiment turns, perhaps as a result of increasing regulation of the tech sector. In such a scenario, those companies priced to perfection will likely be hit the hardest.
Another more-widespread market crash can’t be ruled out either. How many inexperienced traders who have benefited from the recovery will be able to maintain their composure if we experience a significant second wave of the coronavirus? Given our tendency to swing from greed to fear in a heartbeat, I’d say at least some will panic. Remember also that a good number of the stocks SMT holds are very liquid. If there’s another stampede for the exits, people will sell what they can, not necessarily what they want to.
In this sense, it might be argued that the FTSE 100 offers a better margin of safety. Then again, value-focused investors have been ‘wrong’ for years.
Keep calm and carry on
On reflection, however, I’m staying put. While the staggering rise of some of its holdings does make me nervous, the fact that SMT is diversified across 89 companies should provide some protection in the event of a few experiencing problems. You also need to remember that market moves — even sizeable ones — are unlikely to matter much over a lifetime of investing. The passage of time and the freedom to do nothing remain the private investor’s key advantages when building a nest egg for retirement.
So, as tempting as it may be to snatch at profits, my view is that anyone already invested should continue holding and add on any weakness. That’s what I’ll be doing anyway.
As a long-term holding for fund-focused, growth-minded investors, SMT takes some beating.
