A couple of months back, I reviewed the situation of the Scottish Mortgage Investment Trust (LSE:SMT). It had recently hit 52-week lows and I was seriously considering buying. After deciding to wait for a week to see if the stock would continue lower, holding off proved to be a wise call. It has since fallen further and is down 29% over the past year.
Although I don’t do it often, I’ve changed my view on the stock. Here’s why.
Some things take time
One of the points flagged up to buy the stock is the fact that the share price is at a discount to the net asset value (NAV). In theory, the value of all the assets held by the fund should equate to the share price. The fact that it doesn’t could be an indication that investors feel the stocks held by the fund could fall further.
This isn’t a great sign in itself, but it can be argued that over time, the discount should reduce to a fair value. Yet when I cast my eyes back over the past year, the share price hasn’t equalled the NAV value at any point. In fact, the share price isn’t even currently anywhere close to being where the NAV is. It’s almost 20% lower!
Granted, in five or ten years time, this is unlikely to be the case. But there’s nothing to suggest that in the next year, this situation will materially improve. So even for long-term investors, I feel there are much better options elsewhere.
Exposure to tech could hurt
Another point worth noting is that the Scottish Mortgage Trust is still heavily invested in the tech sector. This includes large holdings in Tesla, NVIDIA, ASML, Tencent, and more.
The underperformance of this area dragged the portfolio down in late 2021 and for much of 2022. Along with others, I started 2023 thinking that tech growth names would bounce back strongly. This hasn’t materliased (yet). Instead, we’ve had announcements of job cuts as firms rapidly readjust to reality.
My concern now is that the US-listed stocks could come under pressure, with the US having a 50/50 chance of a recession this year.
If the US does underperform, the stock market is vulnerable. Of course, I doubt that we’ll see the trust share price fall by another 29% in the following year. But I struggle to see how the fund can outperform if some of the largest holdings don’t rally.
Why I could be wrong
Before calling for my head to roll, I do humbly acknowledge that my viewpoint could be wrong. The fund is run by professional money managers. They might decide to cut some of their holdings and add in new companies that could help to boost performance this year.
Further, the US could avoid a recession (even with interest rates at above 5%). If inflation dramatically eases over the summer, the economy could be in a very different shape to what it is now.
Granted, I feel that scenario is unlikely and so don’t feel Scottish Mortgage shares are the place to be investing right now.
