A lot of shareholders have done very well over the years owning a stake in Scottish Mortgage Investment Trust (LSE: SMT). Recently though, Scottish Mortgage shares have performed badly, losing 46% of their value in the past year.
Is the fall likely to continue? Or should I buy them now for my portfolio, hoping they can again reach £10 and perhaps beyond?
As an investment trust, Scottish Mortgage pools money from its own investors and uses it to buy stakes in other companies. When those firms do well, it can boost the value of Scottish Mortgage shares.
But if the businesses do badly, that can hurt the investment trust’s share price. The falling value of Scottish Mortgage shares largely reflects declining valuations at some of the companies in which it is a shareholder, such as Amazon and Zoom.
Can the trust managers change this to try and improve the performance of their fund? They can do this, for example, through buying new shares for the portfolio and selling some of the existing holdings.
Reduced Chinese focus
There is some evidence the trust is doing just that. For example, it announced last week it has scaled back several Chinese holdings, including investments in Alibaba and Tencent which have been in its portfolio for years. These two companies are down by 50% and 41% respectively in the past 12 months.
Doing this frees up money for the fund to invest in other companies about which it feels more bullish. Scottish Mortgage has a long track record of investing in emerging companies while they still have substantial room to grow.
Risks for shareholders
Of course, that brings risks. Early stage companies can be hard to value. Many of the growth shares in which the trust has been investing heavily in recent decades have suffered recent price falls. That could continue, hurting the value of Scottish Mortgage shares.
To give just one example, Amazon is 2.9% of the trust’s portfolio. The digital giant’s share price is down 45% over the past year. If it keeps falling, that could hurt the valuation of Scottish Mortgage.
Where next for the shares?
Although ups and downs are part of normal life for a trust investing in growth stories, I like the quality and breadth of Scottish Mortgage’s portfolio. As the Chinese pullback shows, its managers are not dwelling on past successes but are trying to keep their investment strategy relevant for a changing landscape.
Growth shares may suffer from weakened investor sentiment for a while. But if companies like Amazon start to see their share prices move up again, I think that will boost Scottish Mortgage shares too. The trust may also benefit from investing in new opportunities during a market downturn. That could prove lucrative in the long term.
Scottish Mortgage traded above £10 per share as recently as March, well after the price of leading US growth stocks like Amazon started to tumble. I think that it can get back to the £10 level as it reorients its portfolio, especially if key holdings see some price recovery.
That may take a while. But as a long-term investor if I had spare cash today, I would buy Scottish Mortgage shares for my portfolio.
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Zoom Video Communications. 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