It’s been a difficult year for the Scottish Mortgage Investment Trust (LSE: SMT), which has had to deal with rapid inflation and most recently, the tragic conflict between Ukraine and Russia. Due to the company’s heavy exposure to technology stocks, which have been severely beaten up in recent months, this has led to the company’s net asset value falling significantly. This has also caused the SMT share price to plunge, and year-to-date it’s fallen over 20%. But there has been a slight recovery over the past week, mainly due to the strong recovery among technology stocks. As such, can the SMT share price climb back to its former highs hit last year?
Companies in the SMT portfolio
The Scottish Mortgage Investment Trust share price is dependent on the performance of the companies that are held in the fund. These include firms such as Moderna, Tesla, MercadoLibre and Nvidia, each of which are technology-focused. As such, the current inflationary pressures have had a very large — and negative — impact. This is because higher levels of inflation equate to increased interest rates, and this restricts growth companies from issuing cheap debt. This has had a major effect. For example, Latin American e-commerce company MercadoLibre has seen its share price fall 40% since its highs last year, and the formerly reliable Tesla has dropped around 25% year-to-date.
The fund also has significant exposure to China. Indeed, Tencent makes up 4.7% of the portfolio, and it also has positions in Meituan, Alibaba and NIO. This has caused several problems recently, due to the tensions between the US and China. Such problems have the potential to force Chinese stocks to delist from US exchanges. This could see Chinese stocks lose more value, causing further negative effects for the SMT share price.
Is the share price too cheap?
There are clearly several risks associated with Scottish Mortgage Investment Trust, as many of the stocks in its fund are operating in difficult environments. Inflation is also showing no signs of slowing down, and this means that further interest rate hikes, and volatility towards growth stocks is likely.
But this does not entirely deter me from buying it, especially with its reputation as an excellently managed fund. Indeed, it has managed to return around 650% to investors over the past 10 years.
The fund is also more diversified than it may initially seem. For example, it also has exposure to non-technology stocks like the luxury fashion group Kering, and luxury car manufacturer Ferrari. Hopefully, this can help offset some of the turmoil among its growth stocks.
Finally, I like the fact that SMT offers exposure to many non-listed companies. These include Northvolt, the Swedish battery cell manufacturer, and ByteDance, the owner of TikTok. Both companies have huge growth potential, yet retail investors cannot participate in their growth now. Therefore, SMT can be an ideal way to gain some exposure to these growing companies. For these reasons, I take the long-term view, and believe that it can reach its former highs once more. This means that I’m tempted to add a position at its current price.