Is the Scottish Mortgage Investment Trust (LSE: SMT) a good buy today? This is a question I have been asking myself recently after the shares declined more than 20% from their all-time high, reached in the middle of February.
At one point at the beginning of March, the stock had fallen 30% in just two weeks.
These numbers might look bad, but they need to be put into perspective. Over the past 12 months, shares in the investment trust have returned 54%, even after including the recent decline.
I think it’s pretty clear why the stock has performed so badly over the past few weeks. Investors have been shunning US technology companies recently due to valuation concerns. As Scottish Mortgage has a significant allocation towards US tech stock, this has impacted the firm’s portfolio.
However, there are a couple of reasons why I’m not too worried about the recent decline in US tech stock valuations.
Scottish Mortgage Investment Trust diversification
The Scottish Mortgage Investment Trust recently announced that it had sold 80% of its holding in Tesla over the past 12 months. This was once its second-largest holding. The manager has also been divesting other Silicon Valley tech socks and reinvesting the proceeds elsewhere.
It is particularly interested in China. The trust’s top holding is now Tencent, multinational technology conglomerate holding company. Another top holding is food delivery enterprise Meituan.
As the group has been increasing its exposure to China, it has sold its shares in Facebook, Google’s parent company Alphabet and cut its stake in Amazon.
According to my calculations, the Scottish Mortgage Investment Trust’s portfolio now has a 22% weighting to Chinese equities and a 37% weighting to US stocks. These exclude private investments, which constitute a small, but not unimportant part of the portfolio.
Difficult to value
Unfortunately, while the company does have exposure to some of the world’s fastest-growing and most recognisable technology businesses, it isn’t easy to value. Early-stage private technology businesses and even public businesses can also be incredibly volatile and difficult to own.
So, even though the trust has put in a staggering performance over the past 12 months, there’s no guarantee this will continue. Competition is growing in the technology sector, which may hold back growth at some of the sector’s largest enterprises.
Therefore, the Scottish Mortgage Investment Trust may not be suitable for all investors.
However, I think technology is playing an increasing role in our lives. The trust has an excellent track record of picking enterprises in the sector.
As such, while I am well aware that it may not always be right, I would buy the investment company to invest in the global technology sector in general.
It might not be undervalued today, but I think many companies in its portfolio will be worth substantially more in 10 to 20 years. So on that basis, it does look cheap.
Rupert Hargreaves 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, 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, Facebook, and Tesla 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.