The Scottish Mortgage Trust (LSE: SMT) is an unlikely name for an investment trust that invests in the best global growth stocks its managers can find. This strategy has paid off in recent years. The SMT share price doubled in 2020 and has risen by more than 450% since 2016.
I have to admit I’m slightly in awe of the performance achieved by the trust’s managers. They’ve delivered massive gains by buying successful growth stocks such as Amazon and Tesla at an early stage in their development. I’ve been wondering if I should give up managing some of my own money and buy shares in SMT instead.
Why I might buy
Past performance is no guide to the future performance of an investment. But SMT’s share price has risen by 1,200% in 10 years. This strong history of growth suggests to me the trust’s managers have a distinctive strategy that’s worked well for quite a long time.
Checking the SMT website, I find the trust’s aim is to “add value over five year time frames, preferably much longer.” Interestingly, SMT’s managers believe that, over short periods, “we don’t see that we can add much more than anyone else.”
So they appear to have great long-term vision about the potential of new business models. They also have the patience and discipline to stay with businesses through short-term problems.
These attributes have seen Scottish Mortgage outperform the market for more than 10 years and grow into a FTSE 100 company. It’s an impressive result, but I think it’s worth considering what might go wrong.
Is this a bubble?
Scottish Mortgage’s growth has been impressive for years. But things really exploded after the market crash in March last year, when popular US tech stocks skyrocketed.
The trust’s largest shareholding is in electric car maker Tesla. At the end of last year, Tesla stock accounted for 8.9% of SMT’s value. Chinese electric vehicle maker NIO is another top holding and represented 4.5% of the trust’s assets at the end of 2020.
Tesla shares rose by 700% last year, valuing this business at nearly eight times more than Volkswagen, even though VW generates more than twice as much profit. NIO stock rose by 1,400% in 2020, valuing this loss-making business at about £65bn.
I’m just not comfortable with these sky-high valuations and rocketing share prices. For me, the performance of these shares over the last year looks very much like a bubble.
SMT share price: my decision
If I’m right and there is a bubble, then history suggests it will pop at some point. If this happens, the value of Scottish Mortgage shares would also be likely to fall sharply. This is because the value of SMT shares is based on the value of the investments held by the trust.
Don’t get me wrong — I think many of the businesses in which SMT is invested are great with strong futures. But everything has a price. For me, many of SMT’s holdings are just too expensive right now.
I won’t be investing in Scottish Mortgage at the current share price. But I’ll continue to follow the trust’s progress with interest.