The Scottish Mortgage Investment Trust (LSE:SMT) share price is down 27% in the last 12 months. In comparison, its benchmark – the FTSE All World Index – is up 4.8%.
Alarmingly, the share price has halved since its high in November 2021. The last six months have been painful for me as an SMT investor. What caused this miserable performance and does the investment trust now represent good value?
Rotation to value
Managers Tom Slater and Lawrence Burns aim to own the greatest growth companies in the world, creating value over a minimum of five years. However, 2022 has been a challenging year for growth companies and especially tough for SMT investors.
The global economy is cooking up an increasingly unfavourable environment for growth companies. High inflation, rising interest rates, and disruptions to the global supply chain are eating away at earnings. Optimism about a change in economic fortunes is weak in the face of Russia’s invasion of Ukraine and Chinese lockdowns.
Thus, the global stock market has seen a rotation from growth to value stocks. This year, the FTSE 100 top performers include oil giants Shell and BP, and commodity companies like Rio Tinto and Glencore. Noticeably, only a handful of the index’s constituents are underperforming Scottish Mortgage.
Scottish Mortgage’s portfolio: the companies of the future?
So which companies do the Scottish Mortgage managers think are the most promising of the future? Slater and Burns build relationships with company founders and academics. These relationships lead to high conviction in their stock picks. In fact, the top 10 companies make up 44% of the investment trust’s concentrated portfolio. All 10 are down significantly this year.
| Holding | Fund % | YTD Return |
|---|---|---|
| Moderna | 6.5% | – 42% |
| ASML | 6.4% | – 25% |
| Illumina | 6.3% | – 39% |
| Tesla Inc | 6.2% | – 41% |
| Tencent | 4.9% | – 21% |
| Meituan | 3.0% | – 19% |
| NVIDIA | 2.7% | – 38% |
| Amazon.com | 2.6% | – 28% |
| Alibaba | 2.6% | – 23% |
| Kering | 2.4% | – 26% |
Even with the deteriorating value in share prices, the investment trust trades at a 6.4% discount to net asset value. This sums up the current lack of appetite in growth stocks. With inflationary and interest rate pressures persisting, I don’t think we have seen a ‘bottom’ in the share price for these growth companies.
China mistake?
Last year, Tom Slater and former co-manager James Anderson reduced their holdings in Western mega cap stocks such as Meta and Alphabet. Meanwhile, they doubled down on their Chinese investments amid increasing Chinese censorship and aggressive regulations.
In the trust’s annual report in March, Slater confessed this may have been a mistake. The managers have strong relationships with Chinese founders and executives as well as academia, boosting their conviction in companies such as Tencent, Meituan, and Alibaba. However, Chinese investment comes with geopolitical uncertainties that make SMT a riskier investment.
Time to buy?
I remain optimistic long term about the management and the companies within the investment trust. I’m sure that the companies dominating the future global economy will look more like SMT’s portfolio than the companies outperforming the global indexes this year. That being said, I’m in no rush to add to my holding as it’s very possible that growth stocks will fall further. I fear that there’s plenty more pain coming my way as a Scottish Mortgage share holder in the coming months.
