Whenever I have covered the Scottish Mortgage Investment Trust (LSE: SMT), I have consistently concluded I would be happy to add the stock to my portfolio.
But have I made a huge mistake? Is buying this trust for my portfolio one of the worst financial decisions I could make?
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Analysing the potential
Shares in the trust have been under pressure recently. The stock is falling as the value of its underlying holdings is also sliding.
Investors are reducing their exposure to high-growth stocks this year. There is no clear reason why investors are moving away from growth stocks and buying value. Although it is generally accepted that rising interest rates are to blame, there is also a strong argument to be made that many of the companies under pressure had stretched valuations.
The Scottish Mortgage Investment Trust has benefited significantly over the past couple of years from its exposure to high-growth equities, such as Tesla. However, as the rotation away from these companies continues, I do not think it is unreasonable to suggest shares in the investment trust could continue to decline.
The question is, has the establishment picked good companies? Or has it just picked firms that looked good because the shares were going up?
Warren Buffett once said that it is only when markets decline that we find out who has been “swimming naked“. We will only find out if a great team really manages the Scottish Mortgage Investment Trust over the next couple of years. If the organisation has selected the right companies, the value of its portfolio should expand as these businesses grow.
If it has not, the portfolio’s value could continue to decline.
Trusting managers to pick the right stocks is the most considerable risk of using trusts to invest. Still, while past performance should never be used to guide you to potential, I think the trust’s track record does indicate that it has the skills required to find the market’s best businesses.
Indeed, over the past decade or so, the trust, which Baillie Gifford manages, has curated a strong pipeline of new ideas and information. It can use these resources to find new investments and test old ideas.
Thanks to this experience and skill set, I think it is unlikely the enterprise will have been buying stocks just because everyone else has. It is more likely the business has taken a slow and steady approach in finding the best companies.
As such, I am still happy to buy the stock for my portfolio today. The shares may remain under pressure in the short term. Nevertheless, I think some of the investments in the portfolio should start to yield results over the next decade.