Scottish Mortgage Investment Trust (LSE: SMT) caught the imagination of investors when the shares shot up during 2020 and 2021. And much of the move appeared to be driven by positive investor sentiment and speculation. Indeed, some of the underlying stock prices and valuations in the portfolio were driven higher during the pandemic.
Was it a bubble?
But the big rises now look like a bubble on the stock’s chart. The gains in the trust‘s share price unwound during 2022. And over the past year it has moved about 30% lower. But does that make it a screaming buy today? Not for me.
The website asserts that: “Today’s technologies and products are tomorrow’s museum pieces.” So instead, the portfolio managers aim to peer ahead and find companies that will change the world.
But it’s hard for any investor to do that with an accurate hit rate. And judging by the weightings, I’m not seeing a great deal of conviction in the list of the trust’s holdings.
There’s something in the ballpark of 140 positions, and many are tiny. For example, I counted around 95 with a weighting of less than 1% each of the trust’s total assets. And many are as small as 0.1%.
But in fairness, the 20 largest holdings make up around 64% of the total assets. And of those, Moderna is the largest at 10.6% and non-listed Tempus Labs is the smallest at 1.5%.
An expensive tail
However, that long tail of smaller positions uses up around 36% of the firm’s assets. And that strikes me as an expensive way to find the next big winners. Of course, I may be wrong about that. But I wonder if keeping a watchlist instead could potentially deliver similar benefits at lower cost.
Maybe that 36% could be deployed by putting it into the top 20 holdings. Indeed, greater conviction could help move the overall performance dial of the trust in either direction.
One interesting comparison is Finsbury Growth and Income Trust, run by Nick Train. The top 10 holdings account for just over 83% of the invested assets. And of those, the largest is 11.7% and the smallest 5.4%.
Long-term performance
However, Scottish Mortgage Investment Trust has a decent long-term record. The firm cites its 10-year performance as almost 421%. And that compares to nearly 207% from the benchmark FTSE All World Index over the period. But of course, past performance isn’t a reliable guide to the future.
Nevertheless, with the share price just above 748p, Scottish Mortgage is trading at around 0.87 of its book value. And that suggests a fair valuation to me. So I can see the attraction of adding the stock to a private investor’s long-term diversified portfolio.
But low-cost tracker funds appeal to me even more. And I’d be inclined to aim to pick my own stocks with leading-edge businesses to hold alongside the trackers.
