2022 was not a pretty year for Scottish Mortgage Investment Trust (LSE:SMT) — it was the worst yearly performance for its shares since the financial crisis. My view is that the fall in the valuation of its sizeable tech holdings walloped the value of one of the UK’s largest listed investment trusts.
It’s the age-old growth versus value debate. In this case, higher interest rates helped growth lose out (with investors having to discount the future earnings of these companies). Hence the negative sentiment regarding the trust’s valuation.
The development is an alarming for me considering the stock’s success story over the last decade. Does the company still represent a good long-term investment for my Stocks and Shares ISA portfolio?
Bull factors for Scottish Mortgage Investment Trust
The trust’s parent company, Baillie Gifford, was an early investor in unicorns like Tesla Inc and Amazon.com Inc. As such, the Scottish Mortgage Investment Trust is renowned for gaining exposure to next-gen leaders. Though these holdings represent past investments, I believe the company is better placed than most to harness high growth opportunities.
Take its big bets on a coming revolution in healthcare. Some of its biggest holdings are tied to this theme, including Moderna Inc, a company that looks set to make a breakthrough cancer vaccine. There may be others coming behind, which could certainly give me some interesting returns in the future.
I must also remind myself that I could buy all this growth potential at an absolute snip — 35% cheaper than if I bought last year.
Bearish headwinds
Shares in the trust will cost me less today, however, is this justified? I note the company is only trading on a 10% discount to its net asset value. The discount is much less than many of its peers, so the fall in value may represent a correction by the market. Indeed, today’s price may more accurately reflect the company’s real value.
Or maybe the market has priced in the negative impact of rising rates? The company has a growth-oriented portfolio. This makes me think higher interest rates can disproportionately hurt the valuation and earnings of its underlying companies. This has a direct knock-on effect on the trust’s share price. I view higher rates as a serious headwind for Scottish Mortgage Investment Trust shares. If inflation continues to flirt with record highs, it won’t be good news for the future share price.
It is for this reason that I have some reticence when it comes to buying shares in the trust right now.
Timing is key
As an investor in a wide range of tech firms like Tesla and MercadoLibre, I believe the asset value of the investment trust has been wounded by falling share prices in the tech sector. There’s a risk this bleeding could continue in the shorter term. But this is less of a concern to me.
Regarding the more vital, longer-term picture, I continue to like the trust’s proven ability to find winning, innovative business models at an early stage, then benefit from their growth by investing in them.
It’s just a question of timing for me. So long as economic conditions don’t deteriorate, it’s likely I’ll purchase some shares in the first quarter of this year.
