The Scottish Mortgage Investment Trust (LSE: SMT) share price was staging a bit of a comeback heading into August. It had reached 735p on 31 July after rising 10% in a month.
However, as I write on 25 August, the shares have slipped back 10% and are now changing hands for 657p. This means the stock is still down a whopping 51% in two years.
Why have the shares pulled back in August? Here’s my take.
Macro worries in China
The growth-focused trust owns a number of Chinese stocks in the portfolio, including food delivery giant Meituan and e-commerce firm PDD Holdings (the owner of Temu, one of the world’s fastest-growing shopping apps). It also has positions in Tencent, electric vehicle manufacturer NIO, and a large unlisted stake in TikTok owner ByteDance.
So, despite selling out of long-time holding Alibaba last year, around 13% of assets are still invested in China. And the major holdings are all heavily tied to the Chinese consumer, which is proving problematic because the Asian country’s economic outlook is deteriorating rapidly.
As a result, investor sentiment around the Chinese economy is at a multi-decade low. And this is probably weighing somewhat on Scottish Mortgage shares, I feel.
Further, there has also been a pullback in US shares throughout August, particularly Nasdaq growth stocks. And the trust has over half its assets in stocks listed on that tech-driven index.
A crumb of comfort
One positive is that the trust’s discount to net asset value (NAV) has narrowed slightly to 18.8%. This figure was as high as 22% a few weeks ago when many Nasdaq shares were rallying while the trust’s shares languished. So, this could be seen as progress, of a sort.
The board has also signaled a willingness to carry on buying back shares in a bid to narrow the discount. Last year, it bought back 36.5m shares at a total cost of £283.3m, which represented 2.5% of the share capital in issue at the start of the year.
While that’s a positive in theory, buybacks aren’t guaranteed to work. In fact, Scottish Mortgage’s stablemate Baillie Gifford US Growth Trust recently said it had abandoned buying back shares because it wasn’t having any positive effect on the discount.
Arguably, the major issue both growth trusts face is their heavy exposure to unlisted stocks. The market just isn’t convinced of the stated valuations of private companies held in Scottish Mortgage’s portfolio, which make up nearly 30% of assets. This is despite an aggregate write-down of 28% across this part of the portfolio last year. So this valuation gap remains a concern.
Taking the long view
In the grand scheme of things, I don’t consider a 10% pullback in Scottish Mortgage shares anything to worry about. The trust explicitly states that it takes an extremely long-term view with its growth investments, often measured in decades. That means shareholders, myself included, are to expect periods of underperformance.
So, while I’m disappointed with the recent performance, I remain bullish long term. Artificial intelligence (AI) seems poised to transform most industries, at least if chip designer Nvidia‘s latest blockbuster quarterly report is anything to go by. And AI is a key theme in the trust’s portfolio.
