In any investment there are naturally peaks and troughs. If you hold cash in the bank, your returns will be dependent on interest rates. If you invest in property, the value of your investment can go up or down depending on demand.
Investing in stocks through a Stocks and Shares ISA or other sharedealing portfolio is often seen as carrying more risk than these investments. This is true to an extent, as individual share prices will frequently move up or down depending on market conditions, company performance, and demand.
Every now and then, however, a company comes along that seems to buck that trend. If you bought shares in Scottish Mortgage Investment Trust (LSE:SMT) at any time over the last 10 years, you may think there is no limit to your returns.
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The SMT share price has gained more than 117% in the last 12 months in spite of the impact of the pandemic. In the past five years, the value of the trust has gained 514%.
But how long can this go on? Can the Scottish Mortgage Investment Trust continue to beat the market at such an excessive rate?
Why has the SMT share price gained so much value?
Rather than focusing on anything related to Scottish companies or mortgages, Scottish Mortgage strategically invests in a number of global companies. It is managed by investment managers Baillie & Gifford.
Their huge success and entry into the FTSE 100 in 2017 came as the result of holdings they had acquired in tech stocks in the US, China, and further afield.
Amazon, Tesla, Alibaba, and Baidu are among the companies in which it has invested heavily. Tesla’s meteoric rise in particular has pushed up the SMT share price, as it now makes up more than 10% of its portfolio.
The trust’s managers, Tom Slater and James Anderson, have a wealth of experience and the share price has clearly benefited from that in recent years. They have proved highly capable of managing the SMT portfolio and could well oversee a further increase in value.
Where is the SMT share price headed?
Scottish Mortgage shares are currently sitting at close to their all-time high of 1,385p. There are a number of possibilities that I think may limit their potential for further growth.
As the trust is so heavily invested in tech stocks, any downward movement within this sector would have a big effect on the SMT share price. In particular, I’m be wary of its holding in Tesla, which I think is overvalued considering its sales to date compared with other carmakers.
Many think that Tesla and other tech stocks on SMT’s books are in a bubble, and I would tend to agree with that. History tells us that investments that see such phenomenal growth as SMT cannot sustain that performance indefinitely.
That’s why I won’t be adding Scottish Mortgage to my portfolio today, but I will continue to watch the share price closely to see how high it can go.
