I’ve been a huge fan of the Scottish Mortgage Investment Trust (LSE: SMT) for years. Yet lately I have taken to warning readers that it may be riskier than they think, and they should reassess its place in their portfolio. With the trust falling by around a quarter in recent weeks, I’m glad I did.
What I originally saw as a diversified global investment trust had become heavily concentrated in the US. At one point almost three-quarters of Scottish Mortgage was invested in the States, with a large weighting towards technology. That largely explains its success, given that US tech has been the world’s top sector for the last decade.
My worry was that many investors did not realise that this was the case. They might then unwittingly double up on the sector by buying a specific US tech fund as well, or investing directly in the trust’s top holdings such as Tesla, Amazon and Microsoft.
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A US tech play
This would leave them overexposed to a correction, which had to come at some point, given Scottish Mortgage’s astonishing outperformance. Nothing that good can last forever.
My other concern was that the trust has done so well, that it could single-handedly unbalance a portfolio. Measured over 10 years, the Scottish Mortgage share price has grown an incredible 895.3%, against just 188.2% for its benchmark, the FTSE All World Index. Some investors like to rebalance, by selling some of their winners. Many will have let the money roll, and become overexposed.
As a rule, I don’t like any single investment to make up more than 10% or 15% of my portfolio, at most.
Success has turned Scottish Mortgage into a mighty behemoth. It is by far the UK’s largest investment trust, with a market cap of £19.3bn. This means a lot of investors will be hurting after the recent share price dip.
They won’t be hurting that much, though. Despite recent turbulence, it still trades 117% higher than one year ago.
I’d still buy Scottish Mortgage
The main reason Scottish Mortgage fell back is wider concerns about the tech sector and growth stocks generally, as bond yields and inflation rise. Until recently, Tesla was the trust’s biggest holding, making up an incredible 10% of the fund. The Tesla share price has fallen by around a quarter as well in recent weeks. A coincidence? Not so much.
Scottish Mortgage remains heavily weighted to tech and other disruptive technologies. Chinese net giant Tencent Holdings is now its biggest holding, followed by life science company Illumina, Microsoft, Tesla, Chinese electric car maker NIO and Chinese e-commerce giant Alibaba.
I would still buy Scottish Mortgage. Its track record is second to none. Managers James Anderson and Tom Slater have done an incredible job. The recent fallback could be a buying opportunity.
However, I would first examine my own portfolio, to see whether it fits. If I already had too much exposure to disruptive tech, I would tread carefully.
