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Scottish Mortgage Investment Trust has smashed the FTSE 100 recently. Here’s why

The last time I covered Scottish Mortgage Investment Trust (LSE: SMT) on 16 September, I said that in my view, the trust had “considerable investment appeal” as part of a diversified portfolio, and that I was backing it to continue outperforming in the years ahead.

Since then, it’s certainly done a good job of outperforming the FTSE 100 index – SMT shares are up by around 19% since my September article, whereas the FTSE has risen by less than 2%. Overall, for the 2019 calendar year, Scottish Mortgage’s NAV rose 26.8%, beating the FTSE 100’s return of 17.3% (and the 22.3% return for its benchmark, the FTSE All-World index) quite comfortably.

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Want to know why Scottish Mortgage Investment Trust has done so well relative to the FTSE 100 recently? Let’s take a closer look at its holdings.

Technology focus

The main reason SMT has outperformed the FTSE 100 over the last few months is that it is a global equity trust that is heavily biased towards the (US) technology sector. The top 10 holdings at 31 December 2019 are listed below.

Company % of Total Assets 8.4
Illumina 7.2
Tesla Inc 7.0
Alibaba 6.8
Tencent 6.1
ASML 4.0
Kering 3.8
Delivery Hero 3.0
Ferrari 2.8
Netflix 2.5

Source: Baillie Gifford

When you consider that the information technology sector was the best performing sector in the S&P 500 index last year with a gain of around 50% and that the US stock market outperformed the UK stock market by a wide margin, it’s no surprise that the trust has done well. Given that the FTSE 100 has very little exposure to tech (one of its major flaws as an index in my view), it’s easy to see why the trust has smashed the UK’s blue-chip index.

Stock selection

It’s also worth noting that many of SMT’s top holdings have performed very well recently. For example, the third-largest holding in the trust at 31 December (7% of the portfolio), Tesla, has surged a whopping 280% since mid-September on the back of rising sales and broker upgrades. This will have had a significant impact on the trust’s overall performance.

Meanwhile, other top holdings such as Amazon, Alibaba, Alphabet (Google) and Netflix have all risen more than 10% over this period.


Can Scottish Mortgage keep delivering strong gains for investors going forward?

Looking at the trust’s investment strategy, my view is that it certainly has the potential to do so over the long term. Right now, I believe we are in the midst of a technological revolution that could last for many years, and I see SMT as well placed to profit.

That said, given the strong performance of the tech sector over the last year, and the fact that many well-known tech stocks such as Tesla have soared, I wouldn’t advise going ‘all-in’ on SMT at present. With valuations across the sector now much higher than they were six months ago, there is now more downside risk in this area of the market, so an element of caution is prudent, in my opinion.

I think the best strategy here is to drip-feed money into the trust during periods of market weakness.

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Edward Sheldon owns shares in Scottish Mortgage Investment Trust and Alphabet. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Netflix, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.