I reckon it’s very rare to see Scottish Mortgage (LSE: SMT) shares trade at a 2% discount to net asset value (NAV). I think this is a buying opportunity, especially for a trust that has a long-term successful investment track record.
Tech galore
I think it’s important to understand the reasons behind the fall in Scottish Mortgage’s share price. Tech is a big theme in the trust and it holds the US and China heavyweights. These include Amazon and Tencent.
Tech stocks have been sitting on some sky high valuations. But to me this isn’t surprising especially given how well these companies have performed during the coronavirus crisis. But these growth stocks have suffered a recent sell-off due to concerns over rising inflation as economies recover from Covid-19.
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But I should add that the fund managers reduced their holding of Tesla and banked a profit before the sell-off. To me this demonstrates prudence, a quality which I like in investment professionals. This is one of the reasons why I’d buy Scottish Mortgage shares in my portfolio.
The economics
Without me going into the economics, if inflation rises then interest rates are likely to rise too. This makes fixed-rate bonds unattractive and hence the prices of these securities fall. Due to the inverse relationship that bond prices have with bond yields, the latter will start to rise.
So what does this mean for tech stocks? Well in such an environment, high growth stocks look unappealing. As my fellow Fool Zaven Boyrazian mentions, the value of the expected future returns for growth stocks loses value. So tech shares with high valuations start to look expensive.
I don’t blame investors for taking profits on their tech stocks. But I think there’s a potential rotation happening from expensive growth stocks to cheaper value shares. Scottish Mortgage is a concentrated portfolio with a tech bias. Naturally, a rout in tech stocks will hit the share price.
Private companies
I thinks there’s also concerns over Scottish Mortgage’s private company or unquoted holdings. These account for 17% of the portfolio.
So in light of the tech sell-off, I reckon there are some investors who are concerned over the valuations of its unquoted companies, especially when some of these are tech-related. But Baillie Gifford, the asset manager behind the trust, cut the value of its unquoted investments in response to the Covid-19 stock market crash last year.
The risks
Scottish Mortgage shares still come with risk. While performance in 2020 was stellar, it isn’t guaranteed this year.
I should stress that the fund managers aren’t afraid to take large stock positions. While Tesla was a great call, it could also work against them. Tech stocks could fall again, which could impact the share price. Also the unquoted holdings could suffer a further valuation cut.
My view
I reckon Scottish Mortgage shares are a buying opportunity. What I’m really paying for is the investment experience of the fund managers. I’d love to see some commentary from the investment professionals behind the trust regarding the tech sell-off.
But I don’t think the trust’s long-term performance is by fluke. I’d bag this opportunity to buy Scottish Mortgage shares in my portfolio at a discount to NAV.
