After an incredible run over the last few years, Scottish Mortgage Investment Trust (LSE: SMT) is now experiencing a period of underperformance. Year to date, the SMT share price is down about 4%. Meanwhile, since mid-February, it’s down about 17%. Over a year, it’s still up significantly, however (+60%).
Is this pullback in the SMT share price a buying opportunity for me? Let’s take a look at the investment case.
Scottish Mortgage: a growth-focused investment trust
A good place to start is to look at Scottish Mortgage’s investment strategy and holdings. SMT’s strategy is based around investing in high-growth companies for the long term. Many of the companies it invests in are disruptive in nature. Often, these companies are still in their early stages, and as a result, are not yet profitable.
Looking at the trust’s most recent holdings data (as of the end of April), we can see that its top 10 holdings include the likes of Tencent, Amazon.com, Tesla, Alibaba, NIO, ASML, and Moderna. Other stocks in the portfolio include Zoom Video Communications, Shopify, Affirm, Netflix, and HelloFresh. These are all high-growth companies.
SMT’s high-growth stocks are out of favour
This focus on high-growth companies explains why Scottish Mortgage has underperformed this year. Right now, such companies are out of favour with the investors. With the global economy reopening and inflation rising, investors have dumped high-growth stocks to focus on reopening ones. The growth stocks that have no (or minimal) earnings and are trading at sky-high price-to-sales ratios have been hit particularly hard. Just look at Tesla. Last year, it couldn’t stop rising. This year, however, it’s down 12%.
Is sentiment towards high-growth stocks likely to improve in the near term? That’s tough to call. With the US economy booming and inflation rising, I think reopening/cyclical stocks could remain in favour for a while yet, at the expense of high-growth stocks. This could hurt SMT’s share price in the short term.
A long-term play
From a long-term investment perspective, however, I continue to see appeal in the Scottish Mortgage Investment Trust. That’s because, in the long run, many of its portfolio holdings are likely to generate strong growth.
Are companies such as Amazon, Tencent, and Alibaba going to be bigger than they are today in five years’ time? Almost certainly, in my view. This growth from the underlying companies in the portfolio should boost the SMT share price over time.
Of course, there are risks to the investment case. One that’s worth highlighting is the fact that portfolio manager James Anderson, who has been a manager of the trust since 2000, is set to leave the firm running the trust (Baillie Gifford) on 30 April 2022. Anderson has delivered incredible results for investors in recent years so his presence could be missed. When he steps down, the trust will be run by Tom Slater and Lawrence Burns.
Another risk worth highlighting is that a significant proportion of the trust is currently invested in non-listed companies. Such companies can see their values swing wildly.
Overall, however, I like Scottish Mortgage as a long-term growth investment. With the trust down nearly 20% from its February highs, I think it’s probably a good time to be buying.
That said, I wouldn’t allocate a large proportion of my portfolio to SMT, simply because many of its holdings are higher-risk.
Edward Sheldon owns shares in Amazon, Scottish Mortgage Investment Trust. 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 Alibaba Group Holding Ltd., Amazon, ASML Holding, Netflix, NIO Inc., Shopify, Tesla, and Zoom Video Communications. The Motley Fool UK has recommended Moderna Inc and recommends the following options: short January 2023 $1160 calls on Shopify, long January 2022 $1920 calls on Amazon, long January 2023 $1140 calls on Shopify, 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.