Over the past decade or so, the Scottish Mortgage Investment Trust (LSE: SMT) has done very well by investing in electric vehicle (EV) maker Tesla (NASDAQ: TSLA).
Indeed, Scottish Mortgage’s Tesla holding became so valuable at one point that it reduced it, so that one share did not have too dominant a position in its portfolio. Even so, Tesla remains the trust’s fourth largest holding and accounts for 4.3% of its portfolio.
From time to time, I consider adding Tesla to my portfolio. I think the business has a promising future and would be happy to buy its shares if I found the valuation attractive. So far though, I have not made such a move.
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If Tesla’s valuation becomes attractive to me, ought I to buy the shares directly – or could it make more sense for me to gain exposure to the popular growth stock by picking up some Scottish Mortgage shares instead?
Answering that question helps illustrate some important points to consider more generally when investing.
Importance of diversification
One is diversification, the idea of spreading risk — not putting all of my eggs in one basket.
Tesla’s sales volumes are growing quickly and that could form the basis of big profit growth, boosting the share price. Then again, increased competition and changes to government subsidies could see Tesla profits fall in coming years. That might hurt Tesla shares, which have seesawed dramatically over the past few years.
Imagine I had £20,000 to invest. I could spread it across a variety of shares, potentially including Tesla.
But what if the only money I was able to invest was £300? Commissions and dealing charges could eat into that if I spread the £300 too thinly. But I would still want the benefit of diversification.
That is where buying shares in an investment trust could help me meet my objectives. Buying £300 worth of Scottish Mortgage shares, I would only be making one transaction. But I would have the benefit of diversification, thanks to its broad portfolio.
Paying the middleman
Then again, although I might be able to reduce some costs like that, might I be adding others?
After all, Scottish Mortgage has built that diversified portfolio by employing investment managers to sift through shares and decide what to buy. An investment trust is ultimately a kind of middleman. That adds costs for shareholders. Scottish Mortgage shares carry an ongoing annual charge of around 0.3%. That may sound like small beer but, over the long term, such fees can add up.
Backing winners
What that charge offers me though is access to a trust management strategy of investing early in growth stories like Tesla. Scottish Mortgage holds shares in SpaceX as well. I could not buy those shares directly on a stock exchange.
There are risks in owning Scottish Mortgage shares. The company’s heavy tech exposure means its share price could fall if growth shares continue to lose steam as investors emphasise profitability in an environment of elevated interest rates.
But I like the diversification, proven strategy and current valuation of Scottish Mortgage shares.
Right now, I would be happy to spend spare cash buying them. Indeed, I would rather get my Tesla exposure that way than buying in directly to the EV maker at its current share price.
