Like many shareholders in Scottish Mortgage Investment Trust (LSE:SMT), I invested in the fund due to the management team’s unique growth strategy and its impressive historic returns. Perhaps I should have heeded the old investing adage “past performance doesn’t guarantee future returns“. This has sadly proved all too true for Scottish Mortgage shares recently.
So, let’s delve into the investment trust‘s return this year so far and whether the stock could enjoy brighter days ahead.
Poor performance
2022 was a torrid year for Baillie Gifford’s flagship fund. The FTSE 100-listed stock delivered a -42% return as inflation started to worry the markets and central banks began hiking interest rates. Optimistic investors might have hoped this year would mark a turnaround for the shares.
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Alas, the negative trajectory has continued. At the beginning of 2023, the Scottish Mortgage share price stood at 716p. As I write, it has slumped to 631p.
In essence, if I had £1,002.40 to invest in the company, I could have bought 140 shares in January. Today, I’d have a shareholding worth £883.40. That’s a 12% decline — and we’re not even at the halfway point of the year.
Growth stock investing
The investment trust’s portfolio is concentrated in growth stocks. Although it uses the FTSE All-World Index as a benchmark, I think comparisons with the Nasdaq-100 are also useful given the nature of Scottish Mortgage’s positions.
Looking at the chart below, it’s concerning to see a widening divergence between the Invesco EQQQ Nasdaq-100 UCITS ETF (which seeks to mirror the index’s net return) and the Scottish Mortgage share price.
The Nasdaq-100 has been buoyed by the strong performances of shares like Alphabet, Apple, and Microsoft. However, Scottish Mortgage doesn’t offer exposure to any of these stock market giants.
Instead, key holdings such as mRNA technology developer Moderna and Chinese online marketplace Meituan have lost value. This has dragged the trust’s share price down in the process.
Patience is a virtue
The fund’s manager, Tom Slater, remains resolute in the face of recent difficulties. Announcing the trust experienced a 19.7% reduction in its net asset value (NAV) in the year to the end of March, Slater said: “We need to remain disciplined and patient“.
Indeed, Scottish Mortgage is designed to be a long-term investment opportunity. It invests in companies that have significant future potential with a time horizon of at least five to 10 years in mind. That chimes with my investment philosophy, which is why I bought the shares in the first place.
What I’m doing
There are considerable risks that the downward trajectory could continue. That’s a particularly acute concern if the macroeconomic environment fails to improve. However, I’m still bullish on the trust’s long-term prospects.
I like the exposure I get to private companies, such as Space Exploration Technologies. Elon Musk’s business venture is one of many firms that Scottish Mortgage invests in for which there are few equivalents listed on public markets.
What’s more, the trust currently trades at a 22.7% discount relative to its NAV. I suspect that differential won’t last forever, suggesting there are reasons to be cautiously optimistic. I’ll continue to hold my shares, hopeful that the fund can rekindle its engine of trailblazing returns.
