After years of shooting the lights out, the outlook just gets darker and darker for Scottish Mortgage (LSE: SMT) shares. They lost roughly half their value in 2022, and are failing to take advantage of the recent recovery too.
They’re down another 13.9% over the last six months, while their benchmark global index has crept up 2.5%.
Measured over one year, investors in Scottish Mortgage Investment Trust have suffered a 32.6% loss, against a drop of the 7.3% on its benchmark.
Until last year’s troubles, this was the most popular investment trust in the UK, and fund platform sales data shows investors can’t resist this falling knife.
The recovery hasn’t arrived yet
I love buying shares after they’ve plunged in value, so I understand why investors are risking their fingers. This could be a once-in-a-decade buying opportunity, but only if Scottish Mortgage gets its mojo back at some point.
I wrote warmly about Scottish Mortgage for years, but started to cool as I began to suspect the tech boom had become overblown. I was amazed to see a risky bet like electric car maker Tesla still the trust’s number one holding, at almost 10% of its portfolio.
Given Tesla’s volatility and what I think is a ridiculous overvaluation, that seemed to be asking for trouble. Holdings in Chinese tech giants Alibaba and Tencent further cranked up the risk/reward ratio.
I became doubly wary when the man who created the fund’s barnstorming reputation, co-manager James Anderson, retired in April 2022. He quit just in time.
Today’s manager Tom Slater’s mission is to identify companies and entrepreneurs who are building the future of our economy and are set to “change the world”, the company says. “Academic research has shown us that a very small number of companies generate the lion’s share of returns. So finding those few companies is what drives us.”
Investors need to be patient here
That’s fighting talk, but it lands better when the economy is booming and money is in easy supply, neither of which are the case at the moment. As central bankers tighten their squeeze, start-ups are struggling to raise finance.
Another concern is that managers investing in visionary companies run the risk of getting caught up in all the futuristic hype. I think that’s happened to Scottish Mortgage. Yet Slater does appear to have learned some hard lessons. And the type of firms he targets are likely to fare much better when recession fears ease and the economy picks up. Investors who get in early could reap the rewards.
Many of its investors will be holding on for the long-awaited US Federal Reserve ‘pivot’, when it starts cutting interest rates rather than hiking them. Start-ups and growth stocks will certainly do better when the rate cycle shifts, but I worry that anybody who expects the tech boom will pick up where it left off is likely to be disappointed.
I remember the aftermath of the dotcom crash in 2000. Markets didn’t stop falling for more than two years. The tech resurgence took almost a decade. I would only buy Scottish Mortgage with a similar timeframe.
Slater himself admits that change doesn’t happen overnight. Nor will the Scottish Mortgage recovery. It could take a decade for this opportunity to play out.
