It has not been a rewarding time to own shares in Scottish Mortgage Investment Trust (LSE: SMT). This week, the share price has been close to its lowest point over the past year. It has fallen 31% over the past 12 months.
But the shares have done well historically and are still up 39% over the past five years. So why have they been tumbling lately – and could this offer me an opportunity to buy shares in a good business at an attractive price?
Changing environment
The approach that worked well for Scottish Mortgage in the past seems to have been spluttering more recently.
The company had performed strongly in recent years in largely thanks to its tech exposure. But holdings such as Tesla have seen some of the shine come off their share prices as they fell from record highs.
That does not make them bad investments for Scottish Mortgage. Tesla shares are still worth more than nine times what they cost five years ago, for example. But as tech valuations have fallen down over the past several years, that has affected the valuation of Scottish Mortgage’s holdings.
Another challenge has been China. For years, Scottish Mortgage was bullish on Chinese shares such as Alibaba, even as their valuations started to fall (Alibaba has seen its share price almost halve in the past five years). Scottish Mortgage has reduced its exposure to Chinese companies, just as some of them have started to see their share prices move up again.
Strategy and tactics
Reducing Chinese exposure is a bit like the trust’s increasing healthcare portfolio in recent years, so far as I can see. In trying to implement its investment strategy, the trust needs to make choices. Regions and sectors may become more or less in line with that strategy over time.
I therefore think its reduction in Chinese exposure is just the sort of rotation to be expected from a trust investing for the long term with a specific investment strategy in mind.
Instead of focussing on the short-term impact of tactical choices, I am focused on whether I think Scottish Mortgage is implementing a long-term investment strategy that could be rewarding.
I’d buy
Owning shares in an investment trust means accepting the ups and downs of its portfolio performance. Scottish Mortgage had a great few years but the past year and a half has been challenging.
If I were considering an investment now, I need to ask myself where I see things going from here. Does the growth-focused strategy still make sense? Is the Scottish Mortgage share price attractive?
Growth shares could see more challenges in coming years, as high interest rates hamper investment. But as a long-term investor, I think a growth-focused strategy like that of Scottish Mortgage continues to have merit.
Trading near a year low and at a significant discount to net asset value, I see the Scottish Mortgage share price as attractive. If I had spare cash to invest today, I would add the company to my portfolio.
