Over in the US, Nvidia has enjoyed a big rerating since the beginning of 2023 and the share price has soared.
Meanwhile, my investment in Scottish Mortgage Investment Trust (LSE: SMT) has benefitted from the stock’s move. I drip-fed money into the trust’s shares over the past few bearish years.
It’s been one way of gaining exposure to fast-growing US and other foreign stocks without investing directly in them.
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Nvidia is the main supplier of artificial intelligence (AI) microchips, and strong financial and trading performance has helped to power the stock.
However, US stocks like this tend to trade at higher valuations than UK growth companies, so there’s risk in that situation for investors. I’m more comfortable sticking with investments listed in the UK.
Scottish Mortgage is holding some exciting names alongside Nvidia, such as Moderna, Amazon.com, Tesla and others.
The Trust targets companies “at the forefront of structural change”. The managers warn the strategy can lead to “inevitable” volatility for the underlying stocks and the share price of the trust.
They’re not kidding. Between autumn 2021 and spring 2023, Scottish Mortgage plunged by around 60%. However, the recent bull market and progress in the underlying businesses has been lifting the shares.
The managers believe share prices follow fundamentals in the end, and “progress always prevails”. The trust is for long-term shareholders committed to investing in progress, they assert. Returns will not arrive in a “straight line”.
One risk with Scottish Mortgage is that sometimes the underlying cutting-edge enterprises fail to live up to expectations. Meanwhile, a long-term perspective means I may wait years before discovering my investment in the trust is under-performing.
Riding the bull market
In many cases, the top holdings in the trust have already become huge businesses. Nvidia, for example had a recent market capitalisation of around $2.35 trillion.
Such enterprises attract a lot of attention, and Scottish Mortgage is one of many trusts and funds holding the stock. However, Nvidia is also helping to power low-cost tracker funds. Over the same period, my US tracker has matched almost identically the 25% performance of Scottish Mortgage.
So another long-term risk of investing in the trust is the fees could eat into my long-term returns.
Meanwhile, billionaire Warren Buffett monitors America’s S&P 500 index in his annual letter to the shareholders of Berkshire Hathaway.
Between 1965 and 2023, he reckons the compounded annual gain of the index with dividends included has been 10.2%. That’s not a bad rate of return for a buy-and-forget strategy. But there have been many stomach-churning lurches along the way.
However, Scottish Mortgage also picks companies outside America. Meanwhile, with the share price near 871p, the price-to-tangible book value is around 1.05. That suggests it’s not wildly over-valued compared to the underlying assets.
On balance, I’m happy to hold my Scottish Mortgage shares for the time being. Despite the risks, the trust may prove to be one vehicle capable of riding the bull market we are seeing for stocks and shares right now.
