Shares in the Scottish Mortgage Investment Trust (LSE: SMT) have moved around a fair bit lately. They’ve lost around 18% in a month, although they have still returned 122% over the past year. I find it helpful to try to understand why the Scottish Mortgage Investment Trust share price moves around like this.
Here are two of the factors I see possibly influencing the shares’ performance.
Heavy tech exposure
The trust is heavily exposed to stocks in emerging technologies in growth markets. For example, its biggest holding in its most recently reported portfolio breakdown was Chinese Internet giant Tencent. That means that the Scottish Mortgage Investment Trust share price is broadly linked to the fortunes of certain sectors and markets. This can change over time, but the current portfolio is heavily skewed towards tech. For example, Amazon and Tesla made up 11% of its total value in the most recent holdings list.
So, it’s no surprise that when some of its large holdings see significant price drops, the trust also gets marked down by investors. Tesla started last week more than 20% down on the year so far, for example. It then recovered somewhat, which may help explain why the Scottish Mortgage Investment Trust share price also moved up.
Growth focus
It’s easy to get obsessed by short-term share price movements. But investing guru Warren Buffett emphasises that while it may be a voting machine in the short-term, in the long-term the market is a weighing machine. Instead of reacting to short-term price moves, he focusses on trying to find companies that have substantial growth opportunities ahead of them.
That is similar to the trust’s approach. Its holdings in companies such as Tesla, Illumina, and NIO are focussed on the long-term potential of each company’s business model and target markets. So far, the trust’s stock pickers have proven themselves to be very talented at finding growth stories in which to invest.
Past success doesn’t mean the track record will necessarily continue. There is also a risk that an attractive story is an unattractive investment if bought too expensively. But the trust’s strategy and stock picking approach mean I pay more attention to its long-term prospects than short-term movements in the Scottish Mortgage Investment Trust share price.
The Scottish Mortgage Investment Trust share price and exchange rates
A second factor which helps explain some movements in the Scottish Mortgage Investment Trust share price is exchange rates. None of its top 10 holdings are denominated in sterling, for example.
I don’t think that necessarily makes it a better or worse investment. However, it does mean that it can be affected by moves in exchange rates. For example, one American dollar is worth 71p today. But a year ago it was worth 80p. That might not sound like much. But such shifts in exchange rates have a significant impact on the valuation of multimillion dollar positions.