A Stocks and Shares ISA offers a great way for investors to maximise their returns. Each year, every investor is granted a £20,000 use-it-or-lose-it limit. With the profits made through an ISA, not a penny is paid in tax.
However, it can be difficult to know where to start when it comes to investing in one. I reckon a good bet could be Scottish Mortgage Investment Trust (LSE: SMT).
It’s a leading trust that invests in 99 companies across the world. With any spare cash, I’ll be adding it to my ISA this month.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Market-beating returns
Scottish Mortgage has proved over time that it’s more than capable of beating the market.
Over the last 12 months, it’s up 37.1%. The FTSE 100, on the other hand, is up 4.9%. A similar picture is painted when looking at returns over a five-year period. Scottish Mortgage is up 58.2% during that time, while the Footsie has returned 10.5%.
That said, looking at its returns over a decade is what really highlights its potential. In the last 10 years, the trust has climbed 337.9%, an average of over 30% a year.
The Footsie during that time has gained 19.5%, just shy of 2% a year on average. What’s even better is that through an ISA, these gains would be tax-free.
That reinforces management’s aim to “maximise total returns over the long term” through owning “the world’s most exceptional public and private growth companies”.
Not a smooth ride
But investing in a trust like Scottish Mortgage doesn’t provide a smooth ride and there are risks I must consider. It focuses on owning growth stocks. The performance of these tends to be volatile.
That’s because with these stocks investors are predicting the company to grow earnings at a faster pace than the rest of the market. If they fail to do so, their share prices often come crashing down.
Furthermore, they tend to prosper in low interest rate environments but suffer in high rate environments, such as the one we’re currently in. This is because they have large amounts of debt to fuel growth. With higher rates, this debt becomes more difficult to pay off.
A bargain
But with that in mind, I see now as a smart time to pick up some shares. Rate cuts are likely this year. I reckon Scottish Mortgage could prosper on the back of them.
On top of that, the trust is currently trading at a 7.5% discount to its net asset value. That means I can buy high-quality companies that it owns, such as Amazon and Spotify, for cheaper than their market rate.
That being said, a quarter of its holdings are private companies. Valuations for these businesses are difficult to pinpoint. Should they go public, their valuations could fall significantly.
I plan to buy
Then again, I also find that exciting. Scottish Mortgage owns some of the most interesting companies out there right now, such as Elon Musk’s SpaceX.
While I’m expecting large periods of volatility, Scottish Mortgage has proved its worth over a long-term investment horizon. And that sort of strategy suits me down to the ground. That’s why I plan to snap up shares for my ISA in May.
