The Scottish Mortgage Investment Trust (LSE: SMT) is one of London’s most successful investment businesses. Over the past five years, thanks to a series of well-timed bets on tech companies, the firm has returned nearly 370%. The peer group return is 100% over the same time frame. Of course, past performance should never be used as a guide to future potential.
The trust, which is managed by the fund group Baillie Gifford, has performed well by sticking to its bread-and-butter growth companies. However this year, the firm has pivoted away from Western tech stocks to focus more on Chinese equities.
Wrong place at the wrong time
Unfortunately, Chinese policymakers have started to clamp down on the country’s largest tech firms over the past few weeks. Chinese regulators have launched a series of investigations, and policymakers have banned some companies from raising money from overseas investors.
In its latest move, China’s state media has attacked the gaming industry for peddling “spiritual opium.” The article highlights Tencent‘s flagship game, Honor of Kings, as one of its main targets. This is the world’s top-grossing video game.
In response, Tencent has announced it will be introducing new measures to reduce the amount of time gamers spend on its apps. Unfortunately, the attack has already had a significant impact on the company’s stock. It’s fallen by more than 10% this week.
Tencent is the largest holding in the Scottish Mortgage Investment Trust’s portfolio. According to the company’s latest portfolio update, the Chinese gaming stock accounts for nearly 6% of assets under management. In total, Chinese equities make up nearly 20% of the fund’s portfolio.
With this heavy allocation towards Chinese equities now under attack from regulators, it’s no surprise shares in the trust have fallen below their net asset value. At one point in June, the discount widened to 5%. This suggests investors are worrying about the company’s exposure to China. The 12-month average discount is around 1%.
Time to buy SMT?
I’m well aware of the risks involved investing overseas, especially in regions like China. Nevertheless, I’d still buy the Scottish Mortgage Investment Trust. Indeed, while Chinese equities make up nearly a fifth of the fund’s portfolio, the US remains the largest allocation. It also has roughly the same exposure to European stocks as it does to Chinese firms.
Further, I think that in the long run, China’s economy will only continue to expand. This suggests that while companies like Tencent might currently be facing selling pressure, they should continue to grow in the long term. As profits expand, the share price should follow suit.
As such, I’d look past these near-term headwinds and buy the SMT for its long-term growth potential today. With its portfolio of growth stocks and track record of picking disruptive companies, I think the fund and its managers are worth backing.
