Scottish Mortgage Investment Trust (LSE:SMT) shares are among the worst performers on the FTSE 100 over the past year. The publicly traded investment trust focuses heavily on growth and tech stocks.
So why has Scottish Mortgage performed so poorly in 2022, and is now the right time to buy?
Underperforming
Scottish Mortgage is heavily focused on growth. And this is not an area of the market that has performed well.
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There are several reasons for this. Firstly, growth stocks, across the board, started to get very expensive in 2021, and this eventually engendered a selloff, prompted by a surge in treasury yields.
Moreover, the macroeconomic environment is not conducive for growth. Higher inflation, higher interest rates and a recessionary environment are likely to hit growth stocks harder than value shares.
Basically, growth stocks are hit harder than value ones by the change in interest rates because their cash flows are further into the future.
The portfolio
The Baillie Gifford-managed trust invests primarily in stocks listed in the US and China, as well as unlisted companies. Scottish Mortgage owns shares in a number of household names, including biotech Moderna, EV maker Tesla, and Elon Musk’s SpaceX.
Its five biggest holdings are Moderna, Illumina, ASML Holding, Tesla and Meituan. All of which are down considerably over the past year.
In fact, none of the trust’s top 10 holdings have made gains over the past year. Even Kering, the only non-tech stock to appear in the 10 holdings, is down. The French multinational, which owns brands such as Balenciaga, Bottega Veneta, Gucci, Alexander McQueen and Yves Saint Laurent, has seen its share price fall 25% over 12 months.
What’s next for the trust?
Scottish Mortgage is known for picking the next generation of big winners. It bought Tesla and Moderna before people knew about them and made billions.
In fact, over five years, the stock is up 73%, despite being down 45% over the last 12 months. That’s a marked contrast versus Cathie Wood’s flagship portfolio, Ark Innovation. The Innovation portfolio is down 9% over five years, and this is fairly reflective of the her other portfolios.
While Scottish Mortgage invests in growth, it appears less speculative than Wood’s focus on disruptive innovation.
I already have some of the stock in my pension, but I’m buying more. While I’m enticed by the trust’s track record, I’m also encouraged by the valuations of the stocks it owns. After a bad year for growth stocks, many of the companies in SMT’s portfolio are now trading with attractive multiples.
There are, naturally, risks. Higher interest rates aren’t positive for growth stocks as they increase the cost growth. And this UK-based trust largely buys US-listed stocks. If the pound appreciates against the strong dollar, the funds gains could be wiped out.
Despite these factors, I see this as a good long-term addition to my portfolio.
