A rising tide floats all boats and Scottish Mortgage (LSE: SMT) shares have been lifted by a buoyant start to 2023.
The investment trust is up 1.82% year-to-date, which is far from spectacular but offers mild respite from a dreadful 2022, which saw Scottish Mortgage shares crash 46.1%.
If I’d invested £1,000 in FTSE 100-listed Scottish Mortgage shares one year ago, I’d have just £538 today. Thankfully, I didn’t.
Scottish Mortgage shares have plunged
I was a big fan of Scottish Mortgage, until I picked apart its portfolio and became wary. More than two-thirds was invested in the US, with what I felt was a highly concentrated exposure to the rampant tech sector.
Scottish Mortgage rocketed because top holdings like Amazon and Tesla had rocketed. As far as I could see, this outperformance couldn’t continue, and it didn’t.
At its peak, when the trust was worth more than £20bn, around 10% was in Tesla. That was always a risky call and has backfired in style, with the electric car maker down 67.95% over one year.
Scottish Mortgage doubled down with a stake in another risky Elon Musk venture, the privately owned Space Exploration Technologies. Other tech holdings have taken a beating, notably Amazon, which is down 46.7% over 12 months.
Manager Tom Slater has pumped up the risk factor by investing in more than 80 private companies in the last decade. He’s had notable successes, making a prescient £50m private company investment in Alibaba, which flew to more than $250m after the Chinese web giant floated. Lately, Alibaba has been less rewarding, falling 14.43% over one year and 44.35% over five.
Other private companies include electric battery maker Northvolt and Upside Foods, which is developing a way to grow meat directly from cells, rather than animals.
These are both exciting ventures, but risky. As investors fled risk last year, they fled Scottish Mortgage too.
Now could be the time to buy
Given its strategy, Scottish Mortgage will inevitably face highs as well as lows. During the cheap money era, the highs were quite staggering. The trust jumped 33.4% in 2018, 55.4% in 2020 and 62.8% in 2021. Long-term investors are still well ahead. Over five years, the trust is up 56.27%.
Scottish Mortgage did not suddenly become a bad fund last year, even if certain chickens did come home to roost. Yet it operates in a different world today, as inflation soars and central bankers tighten monetary policy.
Events could swing back into its favour when the US Federal Reserve ‘pivots’, probably later this year, and starts cutting interest rates. Yet I don’t foresee a fast return to the glory days of tech dominance, and Scottish Mortgage shares are unlikely to retrace former glories. They should do well over the longer run, though.
Despite my reservations, I’m tempted to buy a small stake in the fund. After such a battering, the recovery potential is high. Plus, I have little private equity and US technology exposure. It would plug a gap in my portfolio, and I’d rather invest when it’s down in the dumps rather than riding high.
