Many UK investors seeking exposure to booming tech stocks during the pandemic were left nursing losses after Scottish Mortgage Investment Trust (LSE:SMT) shares tanked in late 2021/early 2022.
It lost more than half of its value from peak to trough.
Simply put, the investment trust invests in companies and its value reflects the value of the companies held within its portfolio. In 2021/2022, the bubble burst and stocks came tumbling down from sky-high valuations.
However, Scottish Mortgage stock remained depressed for some time following the pullback. In fact, rather tellingly, the trust went from trading at a premium to its net asset value (NAV) in 2021 to a discount by 2023.
This tells us that investors were willing to pay £1.10 for £1 of Scottish Mortgage assets in 2021. In 2023, the discount suggested we were getting £1 of Scottish Mortgage’s portfolio for as little as 80p.
So what’s happened over the past two years? Well, the stock is up an impressive 63%. This reflects a reduction in the NAV discount, but also Scottish Mortgage’s exposure to the booming artificial intelligence (AI) segment, among other winning trades.
This means that £20,000 invested two years ago is worth £32,600 today. A great return from a trust.
Why it remains popular
The trust primarily targets innovative companies shaping the future across sectors such as technology, healthcare, and clean energy.
Its portfolio includes both listed and unlisted firms, with large positions historically held in companies like Tesla, Nvidia, and SpaceX.
Unlike traditional and more diversified trusts, Scottish Mortgage aims to capture exceptional returns from a relatively small number of transformational businesses.
However, this strategy makes it more volatile, particularly during market rotations away from growth stocks, as seen in 2021–22.
The managers focus on holding companies for years, believing that innovation compounds value over time.
Essentially, Scottish Mortgage gives investors exposure to some of the world’s most disruptive and fast-growing firms, but with higher risk than more conventional, income-focused trusts.
Where next?
Tech valuations remain a hot topic. After a strong run over the past 18 months, many leading technology names appear richly priced once again. This has prompted concerns — myself included — about the potential for a pullback.
Scottish Mortgage’s top holdings illustrate the tension between justified optimism and frothy valuations.
Companies like Amazon, Meta, and TSMC trade on reasonable multiples given their scale and earnings power. Meanwhile Tesla’s valuations look far more demanding.
The trust also holds private stakes in SpaceX, which has captured huge investor enthusiasm around Elon Musk’s ventures — clearly, there’s a lot of love for Musk within the portfolio.
Meanwhile, positions in firms such as MercadoLibre, Spotify, Sea Limited, and Ferrari provide diversification but are still influenced by broader tech sentiment.
Overall, while these businesses are undeniably impressive, expectations are high, and even a mild correction in growth stock valuations could hit performance.
I wouldn’t be surprised to see a pullback in the near term. Also, remember that Scottish Mortgage practices gearing — borrowing to invest — which can amplify losses as well as gains.
Personally though, I believe Scottish Mortgage will outperform in the long run, and therefore deserves consideration.
