An investment trust buys shares in lots of individual companies, allowing an individual investor like me to get wide exposure simply by investing in one trust. An example is the Scottish Mortgage Investment Trust (LSE: SMT). Scottish Mortgage shares broadly move up or down in line with the underlying value of its investments.
So, when considering what might come next for Scottish Mortgage, it is helpful to understand its investment strategy.
Clear strategy
Helpfully, it sets out this strategy publicly on its website.
The strategy sets out four buckets of investments. One is a catchall “and beyond” which I think lacks strategic coherence.
But the three main buckets all appeal to me as an investor. The key one is “a digitalised world”. The digital transformation that has been seen in retail and media is expanding. Scottish Mortgage is investing in companies it thinks can benefit from this, such as Ocado, Shopify and ASML.
Next is “technology meets healthcare”. The trust reckons the nexus of these two areas allows companies to develop innovative treatments more quickly and less expensively than before. It therefore has investments in firms like Moderna and Illumina.
Finally there is “decarbonisation”. This focuses on a shift towards electrification and renewable energy. It underpins the trust’s ownership of shares such as Tesla.
Investment moves
I like this strategic approach a lot.
The firm has set out a clear strategy, based on trends it expects to grow in importance over coming years and decades. That could mean businesses in those areas boom. By getting in at or near the ground floor, Scottish Mortgage could benefit financially.
But that on its own does not mean Scottish Mortgage shares will soar. Even if they can identify promising growth areas, the fund managers need to find winners within those spaces. They must also consider valuation. Paying too much even for growth can be unrewarding.
I’d buy Scottish Mortgage shares
Inevitably, I do not agree with all of the fund managers’ choices. I would not consider buying Ocado for my own portfolio, for example, as I see it as more of a logistics and warehousing company than a pure tech play.
But that is why investment trusts exist. They let investors such as myself benefit from the broad professional expertise of fund managers. The trust has an excellent track record of identifying promising companies at an early stage. That is not a guarantee of continued success. The managers could make bad choices, while falling tech valuations could continue to push down the value of Scottish Mortgage shares.
I think the track record shows the approach can work well. Looking at the trust’s current strategy, I believe it focuses on promising areas. If it invests in the right shares in those areas, its valuation could soar in coming years. If I had spare cash to invest today, I would buy Scottish Mortgage shares for my portfolio.
