As a long-term shareholder of Scottish Mortgage Investment Trust (LSE: SMT), I’ve certainly been feeling the pain over the last year. Rising interest rates have caused a dramatic sell-off in growth stocks that carried nosebleed valuations. As most of the trust’s holdings are very much in growth mode, this has resulted in Scottish Mortgage shares plummeting 49% in one year.
In fact, the current drop in the share price ranks in the top 10 falls of all time for the trust. That’s significant, given that this is an investment vehicle that has been in existence for well over a century.
Should I be concerned this underperformance might spill over into 2023?
Portfolio reshuffle
The objective of the trust is to find the greatest growth companies in the world and hold them for long periods. This has led it to make more than 80 private company investments over the last decade.
Its first private investment was in Chinese e-commerce giant Alibaba back in 2012. So it’s noticeable that in recent months there has been a reduction in the number of Chinese companies in the portfolio. Its massive holdings in Tencent and Alibaba have been slashed substantially. Meanwhile, smaller positions such as KE Holdings have been sold altogether.
More potential headwinds
One concern I have is that there’s a lag in valuing the trust’s private holdings compared to its public ones. Obviously, publicly traded stocks are revalued daily, but this is only done semi-regularly with private companies. So if unlisted holdings are deemed to be worth less, this could send the share price down further.
Scottish Mortgage’s largest private holdings (as of 31 October 2022)
| COMPANY | WEIGHTING |
| 1. Northvolt | 3.8% |
| 2. Space Exploration Technologies (SpaceX) | 3.3% |
| 3. Bytedance (TikTok) | 2.3% |
| 4. The Brandtech Group | 2.0% |
| 5. Tempus Labs | 2.0% |
Another issue is that the trust has now reached its 30% limit for unlisted companies. That means it’s unable to deploy any further capital into new or existing private holdings. That could be problematic if any of these firms face liquidity issues in the near future.
However, it should be noted that the majority of the firms in the portfolio are profitable. Holdings such as Amazon, Nvidia, Ferrari and Kering (owner of Gucci) won’t need to raise cash any time soon.
Will I buy more shares?
When I think about how macroeconomic issues could affect the portfolio beyond 2023, I ask myself certain questions. Does a 4% interest rate prevent SpaceX returning astronauts to the moon in the next five years? Will a recession stop Moderna – with $17bn on its balance sheet – from making progress on its mRNA cancer vaccine?
Or could tightening monetary policy restrict TikTok from growing its 1.5bn monthly active user base over the next decade?
There may be many technical challenges that prevent these companies from reaching their ultimate potential. But I doubt these difficulties will have anything to do with central banks.
For the first time in over a decade, stocks linked to technological innovation are ‘on sale’. I think that creates an opportunity for long-term investors, such as myself.
I haven’t topped up my Scottish Mortgage holding in a few years. But I’m inclined to start buying more shares at today’s price.
