The Scottish Mortgage Investment Trust (LSE:SMT) gives UK investors like me §quick and easy access to the best of US tech stocks. So, it’s no wonder its share price has soared this year. The £16bn trust stands out as one of the top UK investment trusts.
At the end of October, nearly 11% of its portfolio was in Tesla (NASDAQ:TSLA). Next up was Amazon at 7.3%, followed by Chinese tech giants Alibaba and Tencent. The trust also contains Illumina, ASML, NIO and Kering in its top 10 and has limited exposure to Netflix, Spotify, Ferrari, Zoom, Shopify and Alphabet. As well as these quoted companies, it holds the right to invest up to 30% of its fund into privately-held companies such as Stripe.
But isn’t Tesla overvalued?
While Tesla shares have soared, it’s now operating on a price-to-earnings multiple of 1,159. This means it’s valued at over 1,000 times its annual income. This is unprecedented and some analysts are concerned it’s in an unsustainable bubble. In fact, some say the height of the 1999 dotcom bubble was the last time tech stocks were valued in such a way. That didn’t end well for investors.
Nevertheless, Tesla has a massive following and many believe they’re investing in the man with the vision, rather than the electric vehicles themselves. CEO Elon Musk is that man, and he’s a force to be reckoned with. He’s achieved more in his 49 years than even the most accomplished citizens can hope to in a lifetime. And that rumour about Tesla being reminiscent of the dotcom bubble has been circulating for over three years! It doesn’t seem to have worried analysts at the Scottish Mortgage Investment Trust.
The Scottish Mortgage Investment Trust is diversified
Perhaps Tesla will maintain its share price as its loyal shareholders hold with conviction. Time will tell. But if it doesn’t, that would mean 11% of Scottish Mortgage Investment Trust’s portfolio would be negatively affected. And of course, a Tesla demise could have a knock-on effect on other tech stocks.
That doesn’t necessarily spell doom for Scottish Mortgage Investment Trust investors. Its holdings are fairly well diversified across countries and areas of consumer interest. Amazon, for instance, continues to look for ways to grow. Wayfair, the furniture retailer is in its portfolio and food delivery firms Delivery Hero and China’s Meituan are too.
The Chinese holdings have been doing well and China is emerging from the pandemic relatively unscathed. However, growth here may not be so rapid in the future, as the Chinese government looks to tighten its regulation of the tech sector.
Beating the FTSE All-World Index
Investment management firm Baillie Gifford actively manages the trust. It operates on a five-year cycle, meaning it tries to beat the FTSE All-World Index over a five-year period. This means, even if it has a less lucrative 2021 than 2020, it would still have time to recalibrate and invest in the next wave of momentum stocks. Over the past five years, the Scottish Mortgage Investment Trust has beaten the FTSE All World Index, four years out of five. That’s a pretty outstanding track record.
I think investing in it is not without risk. However, it offers me a simple way into international and — specifically — US stocks. And it even comes with a 0.3% dividend yield.