Scottish Mortgage (LSE: SMT) is one of the UK’s most popular investment trusts. It’s not hard to see why. Over the last five years, SMT’s share price has risen more than 330%. By contrast, the FTSE 100 index has risen just 5% over that time.
Is now a good time for investors like myself to invest in Scottish Mortgage though? Let’s take a look at the investment case.
Scottish Mortgage Investment Trust: the risks to consider
There are three main risks to consider with Scottish Mortgage Investment Trust right now, in my view. The first is the trust’s exposure to Chinese technology stocks. At the end of June, there were four Chinese tech companies in the top 10 holdings – Tencent, NIO, Alibaba, and Meituan. Combined, these four stocks made up around 17% of the portfolio. There were also plenty of other Chinese stocks outside the top 10 holdings.
The issue here is that Chinese regulators are cracking down on Chinese technology companies in a big way. For example, China’s State Administration for Market Regulation recently hit Tencent with a fine for anti-competitive behaviour and ordered the company to give up its exclusive music licensing rights. Meanwhile, regulators recently issued new guidelines for Meituan, which runs one of China’s biggest food delivery platforms.
As a result of this regulatory crackdown, these companies have seen billions of dollars wiped off their market values. There could be more pain to come in the near term.
What will happen if yields rise again?
The second risk to consider with Scottish Mortgage is that the trust is very growth-focused. It owns a lot of early stage, high-growth companies that aren’t yet profitable. It also has investments in early-stage companies that aren’t yet publicly-listed.
It’s generally been a very good environment for these kinds of stocks and companies in recent years. With yields so low, investors have piled into high-growth names. However, if yields rise, these kinds of stocks could underperform and this could impact SMT.
Just look at what happened to Scottish Mortgage’s share price in February when yields were rising.
James Anderson is leaving
Finally, the third risk to consider is that portfolio manager James Anderson, who has run the fund for 22 years, is leaving. Anderson has said he’ll hand over the reins in April next year.
This adds some uncertainty. He’s done an amazing job for investors, generating huge profits from stocks such as Tesla, Amazon, and NIO. Will the trust continue to deliver strong returns without him? That’s the big question.
Is now a good time to invest in Scottish Mortgage?
Now, I don’t mean to sound overly bearish on Scottish Mortgage Investment Trust. I still like the trust and I see it as a good option for long-term growth-focused investors like myself. I own some SMT shares in my own investment portfolio and I don’t plan to sell them any time soon.
However, given the risks, I do see SMT as a more speculative buy right now. I think it has a place in a well-diversified portfolio. It’s not the kind of trust I’d load up on though.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Amazon and Scottish Mortgage Inv Trust. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd., Amazon, NIO Inc., and Tesla. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.