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Scottish Mortgage Investment Trust is up 34% this year. Is it too late to buy now?

Edward Sheldon, CFA
Businessman leading a chart upwards

When I covered Scottish Mortgage Investment Trust (LSE: SMT) in mid-September last year, I said it had considerable investment appeal as part of a diversified portfolio. “I’m backing it to continue outperforming in the years ahead,” I wrote at the time.

Since then, the investment trust has certainly outperformed. This year, Scottish Mortgage Investment Trust’s share price is up about 34%. By contrast, the FTSE 100 index (which it’s actually a member of) is down roughly 17%. Is it too late to buy SMT now?

I don’t think so. However, there are some risks you should be aware of.

Scottish Mortgage Investment Trust review

Before I look at the investment case for SMT, it’s worth recapping what this trust actually does, because its name is a little confusing.

Scottish Mortgage is an actively-managed, low-cost investment trust that invests in growth companies listed around the world. The flagship investment trust of investment manager Baillie Gifford, it has absolutely nothing to do with Scottish mortgages. Instead, it predominantly invests in high-growth, disruptive technology companies with the aim of maximising total returns over the long term.

Here’s a look at the top 30 holdings as of 31 May.

Company  Weighting (%)
Tesla Inc 11.10% 9.30%
Illumina 6.60%
Tencent 5.70%
Alibaba 5.60%
ASML 3.70%
Delivery Hero 3.10%
Meituan Dianping 3.10%
Netflix 2.80%
Kering 2.50%
Ferrari 2.40%
NVIDIA 2.20%
Spotify 2.10%
Ant International 1.80%
Alphabet 1.50%
Ginkgo BioWorks 1.40%
Inditex 1.40%
Shopify 1.40%
Zalando 1.40%
HelloFresh 1.30%
Wayfair 1.30%
Tempus Labs Inc 1.20%
You & Mr Jones 1.10%
Workday 1.10%
Intuitive Surgical 1.00%
Pinduoduo 1.00%
Atlas Copco 1.00%
Zoom Video Communications 0.90%
MercadoLibre 0.90%
Vir Biotechnology 0.80%

US tech stocks are driving the SMT share price higher

As you can see, Scottish Mortgage has a strong focus on disruptive tech companies, many of which are listed in the US.

It’s this technology focus that explains why the trust’s share price has soared recently. This year, the US technology sector has been on fire. Tesla, for example, is up around 130%. Amazon is up about 40%. Meanwhile, Zoom Video Communications is up a huge 240%.

It doesn’t surprise me that technology stocks are outperforming this year. The world has been experiencing a digital revolution for years now, and Covid-19 has turbocharged this revolution. All of a sudden, we’re working from home more, shopping from home more, and enjoying more digital entertainment at home. Tech companies are benefiting.

Can tech stocks keep charging higher in the short term? I’m not so sure. Right now, the valuations on a lot of tech stocks do look a little stretched. Yet, long term, I do think the prospects for the tech sector remain attractive. In 20 years’ time, I expect companies such as Amazon and Alphabet (Google) to be much bigger than they are today.

Scottish Mortgage: risks to be aware of

Ultimately, there’s the risk of a pullback here in the short term. Tech stocks have enjoyed a fantastic run this year and I wouldn’t be surprised to see a near-term correction. This could hit Scottish Mortgage Investment Trust’s share price.

However, from a long-term point of view, Scottish Mortgage continues to have plenty of potential, to my mind. I think the current tech revolution could last for years, if not decades. As technology continues to have a major impact on the world in the years ahead, Scottish Mortgage Investment Trust should benefit.

The post Scottish Mortgage Investment Trust is up 34% this year. Is it too late to buy now? appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Scottish Mortgage Investment Trust, and Alphabet. 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. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, and Tesla and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 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.

Motley Fool UK 2020