The Scottish Mortgage share price (SMT) is soaring. Am I too late to buy?

The Scottish Mortgage Investment Trust (SMT) share price has almost doubled in the past two years. But it’s still only on a modest premium.

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I’m a big fan of investment trusts, though I currently only have one in my portfolio. Unfortunately, it’s not the Scottish Mortgage Investment Trust (LSE: SMT). I say unfortunately, because the Scottish Mortgage share price has soared by 189% over the past two years.

On top of that, Scottish Mortgage makes it into the Dividend Heroes list complied by the Association of Investment Companies. To make that list, an investment trust has to increase its annual dividend for a minimum of 20 consecutive years. Scottish Mortgage has achieved that for 39 years in a row, which is an impressive feat.

My current choice, City of London Investment Trust, is top of the list with 55 years of annual dividend increases. City of London has been offering yields of 4% to 5% in recent years, while Scottish Mortgage’s yield is less than 1%. But what it has failed to match in dividends, it has more than made up for in that SMT share price performance.

What mortgages?

So where does Scottish Mortgage invest its shareholders’ money? It’s run by Baillie Gifford, who make it clear on their web site that “these days the trust is Global rather than Scottish and has nothing whatsoever to do with mortgages.” It was launched in 1909, and it’s one of those that have stuck with their quaint old names.

How do we value an investment trust? A typical way is to compare the share price with the trust’s net asset value per share (NAV) figure. Doing that compares what we have to pay for a share, with the value of the investments that we get. If the share price is higher than the NAV, we say the trust is trading at a premium. Alternatively, if it’s trading at less than NAV, it’s on a discount.

SMT share price premium

The Scottish Mortgage share price stands at 1,458p at the time of writing. Comparing that to the trust’s most recent quoted NAV of 1,417p (at 24 September), that’s a 2.9% premium. So if I buy, I’d be paying 2.9% more than the value of the underlying investments. By contrast, my City of London shares are currently on a discount of 0.7%.

I see that as within reasonable bounds, and I don’t think it indicates any kind of outrageous overvaluation. As a comparison, the Lindsell Train Investment Trust is currently trading on a whopping premium of 28%. It’s successful and well-managed for sure, but that’s a bit rich for me.

I can only conclude that the runaway Scottish Mortgage share price success has been down to actual underlying investment performance, and not to overheated bullish sentiment.

US growth stocks

The trust does have a chunk of its capital in big US growth stocks, like Tesla, Moderna and NIO. In fact, around 37% of its holdings are in the US. The risk I see, then, is of volatility. These popular US stocks are on very high P/E multiples. And if they should shake, the SMT share price would surely fall.

I invest mainly in safer income stocks these days, but I would be happy to put a little cash behind a high-flying US growth investment. Scottish Mortgage might be a way in for me (I don’t think I’m too late to buy), with some safety through diversification.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Alan Oscroft owns shares of City of London Inv Trust. The Motley Fool UK owns shares of and has recommended NIO Inc. and Tesla. The Motley Fool UK has recommended Lindsell Train Inv Trust and Moderna Inc. 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.

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