Scottish Mortgage Investment Trust (LSE: SMT) has been defending its strategy this week, now the shares have lost more than 50% since their 2021 peak.
Over five years though, the shares are still up 23%. And they’ve moved pretty much in line with the US Nasdaq. The trust invests in growth stocks, and that’s where most of them are listed.
Growth trend
I see a clear trend here. When US tech stocks were soaring, Scottish Mortgage shares climbed ahead of them. Now they’re down, the trust’s shares have dipped further.
In fact, it’s now on a discount to net asset value of 22% (based on its estimate of fair value). That means we can buy £1’s worth of assets for just 78p.
That tends to happen when investors fear that those asset values might fall further. But that’s where I see a new twist.
Chart divergence
Since February, the two chart lines have diverged. The Nasdaq has moved up, but Scottish Mortgage shares have kept going down. They have though, been flat this month.
Now I try not to read too much into price charts. But when a share depends so heavily on a specific index, they surely can’t keep diverging for long, can they?
Part of the bearish take on the trust might be down to one thing. As well as listed stocks, Scottish Mortgage also holds some unlisted private assets.
Space exploration
This includes firms like SpaceX and Northvolt, which we couldn’t otherwise invest in. I like that about investment trusts. They act as pooled vehicles for us to get in on otherwise unattainable investments.
But there’s a downside too. And anyone who had any cash invested with Neil Woodford before his fall from grace will know it only too painfully.
Woodford’s fund ran short on liquidity, as he moved the cash more and more towards unlisted assets. Then when investors wanted out, there wasn’t enough money in stocks that were easy to sell.
Why I don’t worry
There are two reasons why that doesn’t worry me about Scottish Mortgage. One is that it only has a relatively small amount in such assets. Most of its top-10 holdings are listed stocks, like ASML, Moderna and Tesla.
The other reason is that shareholders know what the trust’s all about. We bought our shares precisely because we want exposure to high-tech growth stocks, with a minor portion going into unlisted assets.
We know the short-term risks associated with this kind of growth strategy. And if we were afraid of short-term volatility, well, it would have been a bad idea to buy Scottish Mortgage in the first place.
Back to growth?
So does the recent Nasdaq uptick mean Scottish Mortgage shares should follow soon? I really don’t know, and I don’t much care.
If the stocks it holds look like good long-term value to me (and they do), then I’m happy. And I’d say investors who can’t cope with short-term growth stock risk should maybe keep away.
