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Why the Scottish Mortgage Investment Trust share price concerns me

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Looking at the performance of the Scottish Mortgage Investment Trust (LSE: SMT) in recent years, its performance is impressive. But can looks be deceiving? When it comes to what happens next, past performance is not necessarily an indicator of the future. I reckon the Scottish Mortgage Investment Trust could be headed for a fall. Here’s why.

Investment trusts as pools of assets

An investment trust is exactly what the name suggests. It doesn’t run its own business and generate profits. Instead, it invests its assets in a variety of other companies. This means that, broadly speaking, the trust’s performance will mirror those of the assets it owns. The correlation isn’t perfect, as investors can value the trust’s shares at a premium or indeed discount to its underlying assets. But the key driver for a trust’s performance over the long term is typically how its underlying assets perform.

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At the end of September, I explained why I was bearish on the Scottish Mortgage Investment Trust share price. Between the day that article appeared and the market close yesterday, the shares had a 0% return, although they moved up and down in between. The concern I had in September was about the mixture of assets that Scottish Mortgage owned. That now concerns me even more than it did back then.

Tech holdings

A key reason Scottish Mortgage has performed so well in recent years is the profile of its investments. It has been heavily invested in tech stocks at a time when there’s been a tremendous bull market in tech. It has also had significant exposure to Chinese tech shares. That has paid off well during a period when  demand for them has soared.

Lately though, there has been a sell-off among some leading US tech stocks. Chinese regulation of tech has increased and key companies like Alibaba have seen their share prices fall steeply. Alibaba is one of Scottish Mortgage Investment Trust’s top 10 holdings. Its New York-listed shares have shed 53% of their value over the past year.

Tech trouble ahead?

Regulatory tightening of the tech sector in China looks set to continue. I also think some of the trust’s other tech holdings could be heading lower soon.  For example, Tesla has seen its shares add 63% on a 12-month timeframe. But over the past month, they’ve been moving downwards.

If leading tech names like Tesla continue to lose value, I would expect that to reduce the value of the trust’s holdings. That could harm the Scottish Mortgage Investment Trust share price.

Against that, some optimists think the tech bull market could continue into 2022. The trust has also been investing more in alternative sectors lately, such as pharma. So even if a tech sell-off does gather steam, the trust could be somewhat insulated. After all, it does have an outstanding record when it comes to finding successful investments. Nonetheless, I am concerned that the Scottish Mortgage Investment Trust is at risk of a fall in the coming months. I won’t be buying.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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