Since the start of the year, the Scottish Mortgage Investment Trust (LSE: SMT) share price has fallen 10%. It is still up 56% over the past year, so many long-term investors have had a good ride. But recent Scottish Mortgage Investment Trust share price performance seems underwhelming.
So what’s behind the SMT share price fall and what would I do about it?
US tech pullback
One reason the SMT share price has dropped lately is a fall in the shares of the US tech names it owns. SMT publishes a full list of its holdings on its website.
Take Zoom as an example. Shares in the videoconferencing provider have slumped 20% this year. That’s because more normal working patterns threaten to dampen demand. SMT holds 1m shares in Zoom. A fall in Zoom’s share price therefore negatively affects the value of SMT’s portfolio. But with a 73% increase over the past year, Zoom has performed well over the longer term.
China tech regulatory concerns
Challenges to the Scottish Mortgage Investment Trust share price are not limited to the twists and turns of the US stock market. A second factor concerns a regulatory clampdown on tech firms in China.
SMT’s seventh-biggest holding is Chinese delivery company Meituan. That business seems to be embroiled in a potential government dispute in China. Its shares have fallen 15% this year, despite returning 121% over the past year.
Relevance for the SMT share price
To understand why this matters, consider the structure of the Scottish Mortgage Investment Trust.
The company does not operate businesses. It is not designing video-conferencing software or employing delivery drivers. Instead it is a collective investment vehicle. It pools money from investors that it uses to buy shares. That means its performance is impacted by how well the companies it holds perform.
Zoom or Meituan falling, for example, is a risk to the SMT share price. It effectively reduces the value of SMT. Its share price is not exactly correlated to its net asset value. But in broad terms if the net asset value falls or rises, the share price will likely roughly follow.
Yet the fact that the Scottish Mortgage Trust share price is affected by such share price movements is actually positive in one way, as far as I am concerned. Most people in the UK have never heard of Meituan. If I was investing on my own I would not consider it as a choice.
But SMT management has scouted out companies like Zoom and Meituan. And despite recent bumps, the portfolio returns overall have been strong. That is why the SMT share price is up 56% over a year and 326% over five years.
My next move
Given its exposure to tech stocks, I would not be surprised if the Scottish Mortgage Trust share price gyrates a bit more quite soon. The tech sector is going through some turbulence. Additionally, the company’s foreign holdings expose it to currency fluctuation risks.
But with its diversified portfolio, I see SMT as an interesting way to get exposure to emerging companies. I will keep an eye on the share price in case it falls to what I regard as an attractive entry point. It is not there yet, however.