Scottish Mortgage Investment Trust (LSE:SMT) and Fundsmith Equity have been two of the UK’s most popular investment funds for the past decade, but 2022 has been tough on both of them. I’d bet on Terry Smith’s vehicle bouncing back first.
Long-term investors in Scottish Mortgage and Fundsmith Equity were handsomely rewarded until this year’s stock market volatility struck. At one point, Scottish Mortgage produced a stunning 500% return over five years. All good things come to an end, though, and recent performance has been disappointing.
Investors lose trust in Scottish Mortgage
Measured over 12 months, Scottish Mortgage has fallen an incredible 41.8%, more than twice the 18.6% drop on its benchmark IT Global index. Fundsmith Equity has also fallen, although its descent has not been as dizzying. It is down 10.6% over one year, against an average drop of 6.5% on the IA Global index, Trustnet figures show.
I’m not surprised that Scottish Mortgage is the bigger faller. As I warned last year, it made a huge punt on US tech, including volatile stocks such as Tesla and Chinese e-commerce giant Tencent Holdings. At one point nearly 70% of the fund was invested in the booming US stock market. That has shrunk to 54% following this year’s bear market.
Fundsmith also went big on the US, although Smith assembled a more cautious portfolio of growth and income stocks. Top holdings include Microsoft, Danish multinational pharmaceutical company Novo Nordisk, tobacco manufacturer Philip Morris and L’Oréal.
Investors have pulled more than £1bn from Fundsmith Equity in just three months, according to FE Fundinfo. They are abandoning Scottish Mortgage, too. The investment trust routinely traded at a premium to the net asset value of its underlying holdings, such was the demand. Today it is trading at a discount of 15.4%.
Yet I wouldn’t sell either fund right now. With Scottish Mortgage, all that would do is crystallise a pretty brutal loss. This has always been a higher-risk fund, and investors have to accept a degree of volatility. They are still well up over five years, with the fund trading 90.4% higher over that time, more than triple the 27.4% growth on its benchmark.
Fundsmith Equity is standing firm
However, I wouldn’t buy the trust today. Funds usually takes some time to recover after the scale of crash Scottish Mortgage has just experienced. Also, it is heavily geared at 12.9% of its portfolio, adding to the risk.
Fundsmith investors also remain comfortably ahead over five years. The fund grew 68.3% in that time, against benchmark growth of 46.9%. It is already showing signs of recovery, rising 3% in the last month while Scottish Mortgage is down another 7%.
2022 has been bumpy for every investor, Smith included, but for now he seems to be sticking to the plan. Fundsmith Equity is a strong core portfolio holding, and if I had to buy one of these two funds today, this would be my first choice. Although I wouldn’t completely rule out Scottish Mortgage. Just look at the size of that discount!
