Scottish Mortgage Investment Trust (LSE:SMT) shares once traded for over £15. It was a barmy market back then, but it’s still a shock to see the growth-focused fund trading for less than half of its highs.
What it does
Scottish Mortgage is a long-established investment trust managed by Baillie Gifford, with a focus on US-listed stocks, as well as unlisted companies in America.
It’s distinguished by its long-term approach to investing in disruptive, innovative companies across various sectors, including technology, healthcare, and consumer goods.
The trust is known for its investments in leading tech giants like Tesla, Amazon, and Alibaba, as well as emerging disruptors before they were household names.
Its growth-oriented strategy has yielded impressive returns over the years, making it a popular choice for investors seeking exposure to dynamic, global markets.
However, those returns went into reverse in late 2021 as growth stocks plummeted. Many growth-oriented firms have recovered, but Scottish Mortgage hasn’t.
NAV discount
When Scottish Mortgage shares peak, the fund’s share price was broadly equal to its net asset value (NAV). However, the fund currently trades with a 17% discount to its NAV.
NAV represents the total value of the trust’s assets, which typically includes the value of its holdings in various companies, minus its liabilities. In other words, it’s an indicator of the intrinsic or book value of the trust’s assets.
In theory, this could mean now is a great time to buy. But there are some consideration.
Notably around a quarter of Scottish Mortgage’s holdings are in unlisted companies. These aren’t publicly traded on the stock market, which means there’s no market-determined value for them.
To illustrate, let’s consider SpaceX. Its owners believe the company is worth $150bn, which translates to a valuation of 33 times revenue. This could be fair value, but these companies are hard to evaluate primarily due to the lack of published and detailed information available.
£10 in sight?
Currently, the NAV of Scottish Mortgage’s holdings is around £8.20 per share. As such, it doesn’t seem likely that £10 a share will come round anytime soon.
It’s also hard to predict where growth would come from. The fund has a very broad portfolio, which even includes luxury stocks like Ferrari, in addition to its traditional focus on disruptors.
The fund’s still significant holdings in Chinese stocks like EV-maker Nio could be a blessing or a curse. Chinese stocks are discounted versus two years ago, but with a swirling debt crisis, one domino could fall and send the market into chaos.
It’s also worth considering interest rates. Rising interest rates can negatively affect the performance of stocks and may pose a challenge to the trust’s growth prospects.
However, with interest rates already at or near their peaks, this could be a tailwind. As interest rates fall, capital tends to flow away from cash and debt and move back to stocks and shares.
