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What was formerly a high-flying share boosted by the tech bull market has stumbled lately. The Scottish Mortgage Investment Trust (LSE: SMT) share price is down 4% over the past year, at the time of writing this article earlier today. It has fallen more than 20% in just the past couple of months.
Below I consider why the shares have been losing value – and what might come next.
What is an investment trust?
A helpful starting point is to understand the structure of the company. As the name suggests, Scottish Mortgage is a form of trust. This means that, rather than running its own business, it acts as a collective investment vehicle. It pools shareholders’ funds and invests them in a variety of companies.
One thing I like about such a structure as a private investor is that it can give me diversification even when buying shares in a single company. If I invest in SMT, I will be exposed to a wide range of companies. So, if any one underperforms, it will hopefully only represent one small part of the trust’s overall performance.
But a possible downside of such a structure is that the SMT share price performance is heavily based on that of the companies in which it invests. In recent years, when holdings such as Tesla and Tencent soared, that was good news for SMT. At the same time, though, if the holdings lose value, that could be bad for the SMT share price too. That has been clear lately.
Tech and the SMT share price
The performance of tech stocks like the ones I mentioned above is important for SMT because it has a tech heavy portfolio. Indeed, the reason the shares have performed so well in recent years is largely because the trust managers have accumulated sizeable positions in a range of tech companies.
The company publishes a list of its holdings. Tech remains a large part of the trust’s focus, with the top five holdings including names such as ASML, Tesla, and Tencent. Recently, concerns about valuation have caused many tech stocks to lose ground. That has had a negative impact on the SMT share price too.
But I think there could be more to come. If tech stocks take a real tumble, or simply keep drifting downwards slowly, I expect SMT to be caught in their wake.
In the short- to medium-term, I see SMT’s heavy tech exposure as a risk. It could lead to the SMT share price losing a lot of value if there is a selloff in the tech sector.
At the same time, tech has led SMT to large gains in recent years – and that could continue. The company is invested in a wide spread of tech names, including some companies with clear growth potential. The tech success has not been an accident, but reflects the share picking skills of SMT’s fund managers.
The long-term fund manager has been winding down his involvement lately. But that does not mean the new manager might not be equally talented. SMT could still have a glittering future. For now, though, its large tech exposure means I will not consider holding it in my portfolio until tech valuations overall look less frothy.
The post What’s going on with the Scottish Mortgage Trust (SMT) share price? appeared first on The Motley Fool UK.
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding 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.
Motley Fool UK 2022