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Scottish Mortgage Investment Trust shares are falling: are they priced to buy?

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Over the last month, Scottish Mortgage Investment Trust (LSE: SMT) shares have fallen by about a fifth. The investment trust run by Ballie Gifford had been one of the standout performers in 2020. Fears of inflation, a US tech sell-off and investors favouring Covid recovery stocks have, I think, all combined to send the share price lower – for now at least.

It’s worth remembering that even after the recent fall, over the last 12 months, the shares are up about 90%. Long-term investors have still done well by holding the shares. The question now is would I add the shares to my portfolio, or do I expect they’ll fall further?

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Stick or twist on Scottish Mortgage Investment Trust shares?

That’s a difficult question to answer because it seems factors outside of the trust’s control are dictating the share price performance. By this I mean investors are turning away from growth stocks, which the trust is well known for, and moving towards Covid recovery and value stocks.

That alongside fears of inflation that seem to have hit tech stocks – especially in the US. Again though, this factor is outside of the control of the trust’s managers. 

However, I’m less interested in the macro picture and would prefer to pick stocks based on their potential future performance. If I hold stocks for the long term, the current machinations of the economy are of relatively little importance.

The challenges and the opportunities 

The challenge therefore for Scottish Mortgage is to show that its big future technology and innovation bets will pay off for investors. We know valuations of tech shares have in some cases become very stretched. Yet that doesn’t mean Scottish Mortgage is necessarily overpriced.

What’s clear is that the managers are highly regarded and the investment house, Baillie Gifford, is supportive of their strategy. It has in place the team to research innovative companies.

The top holdings of the trust are Tencent (6.5%), Illumina (6.1%) and Amazon (5.9%). Tesla has been cut down to 5.1% and is now the fourth-largest holding.

The ongoing charge at 0.36%, according to the January factsheet, is very low for an actively-managed investment. Given that costs can really eat into investment returns, I see this as a major positive.

Growth in the US and Chinese markets could also prove to be a catalyst, as many of the holdings are tech companies from those two powerhouse economies. We know China is already well ahead in recovering from Covid and the US is pumping stimulus into its economy. That should prop up asset prices, including shares.

It’s easy to be critical of a focus on big tech due to how share prices have flown up over the last year. However, Scottish Mortgage has a great track record, good shareholder communications and a stable management team. Overall, while I’m not that keen to pile in, the move to a discount to its net asset value, along with cheap charges and innovative holdings could make it a share that will bounce back this year.

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Andy Ross owns no share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

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