Scottish Mortgage Investment Trust: should I invest now?

Scottish Mortgage Investment Trust has underperformed the market this year. Edward Sheldon looks at whether he should buy shares in the trust now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »