The Scottish Mortgage Investment Trust (LSE:SMT) share price typically reflects the value of the companies it invests in. Currently, the stock is trading at a 12% discount to the net asset value (NAV) of the portfolio. That suggests investors are getting exposure to the likes of MercadoLibre and Amazon at a discount. But it’s not quite that simple.
That’s because Scottish Mortgage also invests in privately listed companies like SpaceX, which is its largest holding. SpaceX isn’t a publicly listed company and as such the valuation is a little opaque. And SpaceX isn’t compelled to publish its financials, so it’s hard to say whether the holding is a real plus for the portfolio.
It’s also the case that Scottish Mortgage uses leverage — gearing currently sits around 9%. In other words, it borrows money to support its investment strategy. This is great if the investments it makes with this borrowed money goes up in value. However, if an investment trust uses debt to buy a stock that falls in value, it’s not a good thing.
This is why Scottish Mortgage can even be more volatile than the rest of the tech sector when the market goes into reverse. This is a risk investors should always bear in mind with investment trusts like Scottish Mortgage.
US tech trends
Scottish Mortgage has significant exposure to US tech, consumer tech, and industrials. The trust’s strategy is to focus on high-growth, innovative firms, many of which generate a large share of their revenues internationally.
A weakening US dollar could provide an under-appreciated support for these holdings. When the dollar falls, US-based multinationals benefit in two key ways. First, their products become more competitively priced abroad, boosting sales volumes.
Second, revenues earned overseas translate into more dollars when reported in US financial statements, directly enhancing earnings. For tech giants with global reach — such as those in Scottish Mortgage’s portfolio — this effect can be significant, potentially driving earnings upgrades and share price outperformance.
While the broader market recognises some of these dynamics, the full impact of currency movements on future earnings may not be fully priced in, especially if the dollar’s decline is sustained or accelerates.
The bottom line
Typically, I believe that well-chosen technology investments will outperform over the long run. Volatility may be heightened, but Scottish Mortgage’s historical performance points to a market-beating strategy.
While bearing in mind the aforementioned risks, it’s important to recognise that Scottish Mortgage’s portfolio is diversified across several high-growth sectors. Some picks may fail in the long run, but other stocks will likely succeed and drive the trust’s share price higher. This is why it’s a core part of my portfolio and one that I believe deserves widespread consideration.
So, where could the stock end the year? Well, my assumption is that supportive trends in the dollar will help push the Scottish Mortgage stock upwards. While anyone’s guess is as good as mine, I’d like to see the stock finish the year around 1,100p.
