The Scottish Mortgage Investment Trust (LSE: SMT) was something of a market darling in the last bull run. From the bottom of the Covid crash in March 2020 to November 2021, it ran up by around 225%. It was a real attention-grabber. However, over the past year, Scottish Mortgage shares have given back much of that gain and dropped by about 46%.
Discount to book value
Now, the share price is near 726p. And today’s discount to book value of around 30% puts the trust on many investors’ radars — including mine. And that’s regardless of its investment philosophy. However, investment trusts do tend to trade with at least some discount to book value most of the time.
There have been many articles written about Scottish Mortgage. But as a reminder, the trust has nothing to do with mortgages any longer. One of the managers — Tom Slater — recently explained the investment approach. He said, Scottish Mortgage aims to find the world’s most exciting and promising underappreciated growth companies. And then it owns its investment in those companies “from youth until maturity”.
I must admit, hearing about that visionary approach puts fire in my belly. When I think of long-term, buy-and-hold investing, that’s the dream. The idea behind such a strategy is to buy now, hold for years and then reap life-changing returns later.
However, investing isn’t that simple in reality. Picking winning high-growth businesses can be fraught with difficulty. And not all of the trust’s investments will likely work out as the managers hope. On top of that, there’s the added risk that comes from speculation. And I reckon the recent Scottish Mortgage share price roller-coaster ride is a good example of such risks in action.
But Slater said he’s optimistic about the trust’s potential. And that’s because it invests in “strong” growth businesses focused on the opportunities arising from “fundamental changes within the economy”.
I can get a flavour of what’s under the hood in the trust by looking at its top five holdings. They are biotechnology company Moderna, lithography specialist ASML, electric vehicle maker Tesla, genetic analysis enterprise Illumina, and Chinese multimedia business Tencent. Together, those five account for just over 30% of the invested capital.
The trust’s other manager — Lawrence Burns — explained that over the long run, he thinks markets are driven by a small number of exceptional companies. And those businesses can “turn out to be much more successful than investors ever expected”.
On balance, I agree with him. But it’s hard for any investor to spot such opportunities early enough. And the trust’s aim of holding outperforming businesses from youth to maturity will not be easy. And that’s probably why the investment capital has been diluted over many smaller holdings as well — it’s almost impossible to know which innovative stocks will work out well over time.
So, after the recent fall in the Scottish Mortgage share price, should I avoid, consider, shortlist, or buy? Well, the outcome of my research surprised me. And I’m keen on the trust’s investment philosophy. Therefore, I’d short-list it with the aim of adding the stock to my diversified long-term portfolio.