Is it finally time to buy Scottish Mortgage Investment Trust?

With Scottish Mortgage Investment Trust down by 40% this year, Harshil Patel considers whether shares in this fund have become too cheap for him to ignore.

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The Scottish Mortgage Investment Trust (LSE:SMT) share price is down by almost 40% so far this year. Has it become too cheap for me to ignore? That’s the question I’m looking to answer today.

Despite its name, this investment trust has nothing to do with mortgages and is more global rather than Scottish. Considered to be Baillie Gifford’s flagship investment trust, Scottish mortgage is an actively managed fund that’s full of innovative growth stocks.

One of its shares that gave it a staggering return was electric car and energy company Tesla. Having first invested in the company in 2013, Scottish Mortgage made an eye-watering 16,000% on its initial investment.

The Long view

Managers at the fund certainly aren’t day traders. They’re focused on at least a five to 10-year horizon. They’re particularly interested in finding the giant growth companies of tomorrow. These businesses should be well-run and have durable competitive advantages.

Much of the fund’s focus is in three areas: the ongoing digital transformation of the world; the intersection between biology and technology; and clean energy plus the electrification of transport.

Currently, one of the top holdings in the trust is Moderna. This biotechnology company became a household name from its Covid vaccines based on mRNA technology. It has the potential to expand its offerings to a wider range of healthcare options over many years.

Technology needs microchips to power the world’s devices. From smartphones to cars, chips are everywhere. Many of the most advanced chips are manufactured on machines made by only one company. That company is ASML and it’s the third-largest holding in Scottish Mortgage Investment Trust’s portfolio.

The past and the future

So how has the fund been performing? Its return over the past decade has been exceptional, in my opinion. On average, it has returned 20% per year over that period. That’s enough to turn a £1,000 investment into over £6,000. That said, more recent investors might be feeling disappointed at its near-40% decline this year. So what’s going on?

Shares have been weak in growth stocks mainly because of a change in stance from the US Federal Reserve. After many years of low interest rates, it announced its intention to reverse this policy with the aim of tackling high inflation. Growth shares benefited from ultra-low interest rates and investors were willing to pay higher valuations.

So now, share prices are correcting lower and as Scottish Mortgage Investment Trust owns many growth shares, it has suffered too. This remains a risk.

Technology trends continue

One thing to bear in mind is that the underlying businesses haven’t really changed in the past few months. I still think key technology trends will continue over the coming years and these companies will continue to innovate.

As a long-term investor, I see the recent dramatic fall in share price as an opportunity to add the fund to my Stocks and Shares ISA. It may now be too cheap for me to ignore. I have to remember, of course, that the market is currently more volatile than usual, so the share price could still fall some more. But I’m confident that over several years, my upside will more than outweigh the downside.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel owns Tesla. The Motley Fool UK has recommended ASML Holding and Tesla. 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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