Scottish Mortgage (LSE: SMT) shares have had a torrid year, falling 47.5% over 12 months. The hugely popular investment trust has crashed out of favour, and investors have lost billions. I’ve been waiting for an opportunity like this. Should I take it?
Scottish Mortgage shares look cheap
One year ago, the Scottish Mortgage Investment Trust had around £22bn of net assets under management. Now it’s just over £11bn. It’s the ultimate ‘BOGOF’ stock. Every pound I invest today buys me twice as much stock as a year ago.
I resisted buying Scottish Mortgage before because it looked like I’d missed the boat with this one. At one point, the share price was up 500% over a five-year period. There’s no way I would buy any stock or investment trust on the back of such incredible past performance.
Investing is cyclical, by and large, and no fund manager can expect to thrash the market forever. Neil Woodford did it for two decades, until arrogance got the better of him. Terry Smith at Fundsmith Equity also has a fine long-term track record, even if his flagship fund is down 12.8% over 12 months.
Scottish Mortgage manager James Anderson seems to have bailed out just in time. But is now the time for me to dive in?
With a low annual charge of just 0.32%, this actively managed trust is cheap to hold. It trades at a discount of 7.6% to net asset value, which makes it cheap to buy too. For years, it traded at a pricey premium of up to 8.4%.
It offers little income, with a yield of 0.46% a year. So the big question is whether Scottish Mortgage shares can rebound. It’s been hammered because it’s heavily skewed towards US technology stocks, and we know what’s happened to them over the last year.
Electric car maker Tesla remains the trust’s second biggest holding, taking up 5.9% of the portfolio. Its share price is down 54.9% in the last year. Elon Musk’s SpaceX is the sixth biggest holding at 3.3% of the portfolio. Talk about doubling down on risk.
The Fed will decide
Vaccine maker Moderna is the biggest holding of all. It makes up 8.8% of what’s clearly a highly concentrated portfolio. Its shares are down 35.33% in a year. Investors loved these stocks last year, now they hate them. But as I said, investing is cyclical. They could swing back into fashion. If they do, snapping up Scottish Mortgage on a two-for-one deal could pay off nicely.
What the recovery requires is a more benign investment environment. We may soon get it. Once the US Federal Reserve indicates that it’s going to stop hiking interest rates, investors may discover their appetite for risk. Scottish Mortgage, being risky, will benefit. It could prove rewarding over the longer run.
It’s a gamble, though. Investors keep jumping the gun, calculating that the Fed will turn dovish, but repeatedly getting it wrong. Yet monetary policy will ease at some point. Scottish Mortgage shares are a high-risk buy, but may also prove highly rewarding. It seems rude of me not to buy them at today’s price so I’m going press the buy button. Wish me luck.
