Scottish Mortgage Investment Trust (LSE: SMT) has been one of the best performing investments on the UK market over the past five years.
Thanks to the trust’s exposure to high-growth stocks such as Tesla, it has returned a staggering 300% over the past five years. By comparison, the FTSE All-Share Index has returned just 10% over the same time frame. Both of these figures exclude dividends paid to investors.
However, Scottish Mortgage Investment Trust has underperformed over the past six months. Since the beginning of July, the stock has lost 3% compared to a return of 5% for the FTSE All-Share Index, an underperformance of 8%. Once again, these figures exclude dividends.
I think this could be an opportunity for risk-tolerant investors like myself to buy the trust at an attractive valuation.
Scottish Mortgage Investment Trust falls out of favour
There has been a shift in market sentiment over the past six months. Investors have moved away from high-growth tech stocks and reinvested their cash in recovery plays. Growth stocks are out, and value stocks are in, even though many of these companies are struggling to recover.
Scottish Mortgage Investment Trust has not been able to escape the pain.
According to its latest factsheet, at the end of November, approximately 16% of its assets were invested in Moderna and ASML. Over the past month, Moderna has returned -12%. ASML has produced a positive return of 3%, but that is still below the FTSE All-Share return of 4%.
These figures are only designed to illustrate the shift away from growth stocks that has affected the value of the trust during the past couple of weeks.
But I think this shift is only likely to be temporary. Most of the companies in the trust’s portfolio are high-quality stocks. They have large profit margins and substantial economies of scale and competitive advantages. They may have fallen out of favour with the market, but their competitive advantages should translate into earnings growth in the long term.
As share prices should track earnings growth in the long run, I think investors will likely return to these stocks at some point in the future.
Growth opportunity
These are the main reasons I see Scottish Mortgage Investment Trust is a no-brainer buy for me today. The trust has a strong track record of picking growth companies, and this experience should help it find new businesses as we advance. At the same time, I think the market’s short-term mentality presents an opportunity for long-term investors like myself.
That being said, there are some risks associated with the stock that I will be keeping in mind. Growth stocks are trading at elevated valuations, and therefore, they could continue to decline in value. These companies may also face disruption in the future, which could remove their competitive advantages.
Nevertheless, even after taking these risks into account, I would be happy to buy the stock today.
