I hold Scottish Mortgage in my own portfolio and I see the trust as a key holding for growth. I’ve always been impressed with both the performance of the trust – which has been way better than that of the broader stock market – and the incredibly low fees. But is SMT still a top choice for my portfolio going forward? Let’s take a look. Here’s my review for 2022.
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What is Scottish Mortgage Investment Trust?
Let’s start with a brief look at what Scottish Mortgage is, because it’s name can be a little confusing. SMT is a growth-focused investment trust that’s managed by Scottish investment firm Baillie Gifford. It invests on a global basis, predominantly in listed companies. However, it also has some exposure to unlisted businesses.
It’s worth pointing out that SMT has nothing to do with mortgages. These days, the trust is very much focused on high-growth technology-related businesses.
In terms of the investment strategy, it’s portfolio managers look for well-run businesses that have strong growth potential. They invest with a long-term view, as they believe that it’s only over periods of five years or longer that competitive advantages and managerial skill within companies are truly reflected in investment returns.
I’m comfortable with the investment style here. I like the focus on growth. And I also like the fact that the trust provides exposure to some unlisted businesses. Normally, unlisted companies are only accessible to sophisticated investors through venture capital funds.
That said, the focus on high-growth stocks does mean SMT is a higher-risk investment trust. I’ll discuss this more below.
What stocks does SMT hold?
At the time of writing, the factsheet for the month ending 31 December 2021 is not available (Baillie Gifford can be very slow to post factsheets) so I don’t have access to the latest portfolio holdings. However, the top 10 holdings in the trust at the end of November are:
Source: Baillie Gifford, data as of 30 November 2021.
There are certainly some great companies on that list. I’m particularly bullish on semiconductor company Nvidia, which is generating explosive growth right now, and ASML, which makes semiconductor manufacturing equipment.
However overall, these companies are definitely higher risk. Moderna, for example, has seen its share price more than halve since mid-August. Similarly, electric vehicle manufacturer NIO has seen its share price roughly halve over the last year.
I’m comfortable with the risk level here. However, this trust is not likely to be suitable for everyone.
The fact that the latest factsheet has not yet been posted makes analysing the performance here a little difficult.
However, my calculations show that in 2021, the SMT share price rose about 10%. This return could be considered a little disappointing given that over the same period:
The MSCI World index returned 22%
The S&P 500 index returned 29%
The FTSE 100 index returned 18%
However, I actually think the return of 10% here for 2021 is pretty good. I say this because a lot of high-growth stocks were absolutely crushed last year as bond yields moved higher. This is illustrated by the fact that Cathie Wood’s ARK Innovation ETF – which invests in similar kinds of stocks to SMT – fell 24% for the year. So I’m not too unhappy with the 10% return here.
Looking at the long-term performance of the trust, this has been very impressive. Over the five years to 31 December, the SMT share price climbed about 330%. Meanwhile, over the 10 years to 31 December, the share price rose about 1,150%. It goes without saying that these are excellent returns.
Overall, I’m very happy with the performance track record here.
Risks in 2022
Looking ahead, there are certainly some risks to consider.
One is that high-growth stocks could continue to underperform. So far this year, this area of the market has taken a beating as bond yields have risen. ASML, for example, has fallen from $796 to $745. This weakness in growth stocks is reflected in SMT’s share price, which has pulled back significantly since the start of the year.
I wouldn’t be surprised to see high-growth stocks underperform in the near term as interest rates rise, so I have to be prepared for some underperformance from the trust.
Stock-specific risk is another issue to consider. SMT often makes big bets on individual companies. This is illustrated by the fact that at the end of November, Moderna was 10.5% of the portfolio. If this stock falls significantly, overall performance will be impacted.
Finally, there’s the fact that portfolio manager James Anderson is retiring in April. This adds a little bit of risk. He’s been a top stock-picker over the last decade and a key driver of returns.
Turning to fees, these remain quite low. At present, the ongoing charge is 0.34% per year. However, I also have to pay trading fees to my broker Hargreaves Lansdown to buy or sell SMT shares. Overall, I’m very happy with the fees here.
It’s worth noting here that the trust currently trades at a discount to its net asset value (NAV) of 3.6%. So if I was to buy more SMT shares today, I wouldn’t be overpaying for the assets.
Is SMT a good investment for 2022?
Putting this all together, I continue to see Scottish Mortgage Investment Trust as a good investment for growth for my portfolio. Long-term performance has been excellent and I like the fact that the trust provides exposure to both listed and unlisted companies.
Having said that, I do see SMT as a higher-risk investment. In 2022, I expect some volatility. So I’m going to keep my holding as a percentage of my overall portfolio relatively small at less than 5%.