Although shares in Scottish Mortgage Investment Trust (LSE: SMT) have performed strongly over the long term, recently things have not been going so well. Over the past year, the Scottish Mortgage Investment Trust share price has fallen by 19%. And it has lost over a third of its value since November.
Could this signal the end of the good times for shareholders? Or is the price fall a buying opportunity for my portfolio as a long-term buy-and-hold investor?
Tech-focused trust
First it is helpful to understand what Scottish Mortgage actually is – and what it is not. It is an investment trust. That means it pools shareholders’ funds and invests them in a wide variety of shares. If the value of those shares moves up, so does the net asset value at Scottish Mortgage. Generally that will also be good news for its share price. If the shares the trust owns fall in value, that will reduce its net asset value. Typically the share price will fall down too, although a trust’s share price is not tied to its net asset value.
So, to make money for shareholders, Scottish Mortgage is looking to buy shares that go up in value. It also pays a dividend. Indeed, it has one of the longest runs maintaining an annual dividend of any London-listed share. So the trust managers may also consider the income prospects of shares they buy. But I have to remember that the trust does not run a business on its own – it is simply a pooled investment. So its value is largely linked to the value of the firms it invests in.
With a history stretching back over a century, Scottish Mortgage has seen investment themes come and go. At the moment it is broadly focused on tech investments. Some of its top 10 holdings include tech giants Tesla, ASML and Amazon. But it has also been pushing into biotech enthusiastically. Indeed, two of its three largest positions right now are in biotech companies Illumina and Moderna.
Is a trust right for me?
As a private investor, I see a number of possible advantages to me from investing in a trust like Scottish Mortgage.
Diversification is an important risk management strategy. If an investment performs badly, owning other companies will blunt the impact of that on my overall portfolio. But when investing myself, it can be expensive to diversify across a large number of companies. By contrast, Scottish Mortgage is managing billions of pounds. So it can diversify across dozens of companies in a range of industries. Buying shares in such a trust can give me the benefits of diversification even if I am only investing a modest amount.
Another advantage is that a trust can invest in unlisted companies in a way that I typically cannot as a small private investor. Take SpaceX as an example. If I think the unlisted space exploration company is a good fit for my portfolio, I will still not be able to buy shares in it. But Scottish Mortgage owns over £300m of SpaceX shares. So investing in it could help me get exposure to SpaceX and other such companies in my portfolio.
The trust employs professional investment managers. That could be good or bad. When things go well, I reckon their expertise could help them find great investment opportunities I might not spot myself. That helps explain why Scottish Mortgage shares have soared 166% over the past five years, During that time the FTSE 100 has gained a paltry 7% by comparison.
But investment managers are not always a positive. Not only do they tend to add costs to a trust, they can also make wrong decisions. If Scottish Mortgage investment managers are too bullish on tech, for example, they might overpay for shares. That could be bad for long-term returns.
Volatile share price
In fact, concerns about tech valuations are one of the main reasons for the downward movement in the Scottish Mortgage share price over the past few months.
That could continue, in my view. Many tech names continue to have high valuations. A market crash could bring them down to earth, and the Scottish Mortgage share price in their wake.
But I am not a short-term trader. Rather, I am an investor with a long-term buy-and-hold perspective. So, could Scottish Mortgage be a good addition to my portfolio looking five or 10 years out? I think it could well be. Rather than focusing too much on individual shares, Scottish Mortgage has clearly identified a number of themes it reckons could be profitable in future. A look at its current holdings makes some of these clear. For example, electric vehicles, biotech, Asian super-apps and delivery services all feature prominently.
Within each of these trends, the trust has invested in a number of leading players. So the way I see it, Scottish Mortgage does not have to be right about all of the trends, or all of the companies it backs. If just some of the trends become massive and only a few of the shares do spectacularly well, the trust could still perform superbly. That may sound optimistic, but it is basically what has happened in recent years.
Yet past performance is not a guide to what will happen in future. A series of bad choices could lead the share price to fall even further in years to come. That said, Scottish Mortgage’s investment managers seem talented at spotting big opportunities selling at attractive prices.
So although I think the share price may still move around a lot in the short term, thinking over a longer timeframe, I would consider adding it to my portfolio. I see it as a way of investing in a diversified group of companies at the cutting edge of some of the planet’s most exciting growth opportunities.
