Scottish Mortgage Investment Trust (LSE: SMT) is a global investment management company that has achieved incredible returns over the last five years. This primarily results from two achievements.
Firstly, the success of its growth-focused investment strategy, which is largely due to acquisitions of technology stocks such as Tesla and Nvidia. Both of these companies, constituting 8.3% of SMT’s portfolio, have shown consistently strong year-on-year performance. Scottish Mortgage Investment Trust’s portfolio currently has a 44% exposure to U.S stocks. With high returns from indexes like the S&P 500 and NASDAQ, it becomes clear how this trust has delivered exceptional returns.
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Secondly, the decision-making of management must be noted. Scottish Mortgage Investment Trust sold 80% of its Tesla shares during May 2021. This was right before an approximate 17% drop in Tesla’s share price across the following month. This company clearly has an effective decision-making process behind its trading.
Making a £1,000 investment
Over the last five years, Scottish Mortgage Investment Trust’s share price has risen 257%. This means a £1,000 investment, placed in January 2017, would now sit at £3,570. Including a 0.6% average annual dividend yield over this period, which would bring in an approximate £50, total investment value would sit at £3,620! This is a very impressive return on investment, and is why this trust has always been held in high regard. Compare this against the FTSE 100, which has only returned roughly 4.5% in the last five years.
Scottish Mortgage Investment Trust has even beaten investment competitors. 3i Group has produced a five-year return of 98%, while F&C Investment Trust sits even lower at 65%. This performance results from Scottish Mortgage Investment Trust’s heavy technology focus throughout the pandemic. It’s clear that the company has performed exceptionally well. But with an 11% drop in share price over this last month, where is this company headed in 2022?
The recent decrease in the share price is due to concerns of an expanding tech bubble. Many investors believe the value of technology stocks Tesla and Nvidia are far over fair value, and are facing correction soon. Such concerns have led to a decrease in SMT’s share price as investors consider the bubble’s impact on this company’s tech-heavy portfolio.
This drop has prompted me to consider whether now is the perfect time to invest. With an exceptionally strong five-year performance, it is tempting. However, there are certainly risks.
Fears over a tech bubble are valid. Nvidia has seen an extremely high annual return of 101%. While it has benefitted Scottish Mortgage Investment Trust, this tech stock has potentially reached its peak value at such returns. Regardless, when looking forward, I am more interested in examining how the trust will adapt to such concerns rather than whether such a bubble is growing.
Scottish Mortgage Investment Trust has altered its portfolio recently. The company now holds large amounts of shares in NIO and Meituan, which exposes its portfolio to the Chinese market. As well as this, fund allocations to healthcare stocks now constitute 21% of the trust’s portfolio, surpassing technology stocks at 17%.
The technology sector is certainly at risk of value correction. While this does still pose danger to SMT, I have confidence in the company’s managerial decision-making to mitigate potential risks. Because of this, I will be looking to add Scottish Mortgage Investment Trust shares to my portfolio.