The Scottish Mortgage Investment Trust (LSE: SMT) is down by almost 40% from last year’s record highs. But this tech-heavy growth fund is still worth 165% more than it was five years ago. The FTSE 100 has risen by just 7% over the same period.
SMT has certainly outperformed my share portfolio over the last five years. I’m wondering if I should use the current share price weakness to add this stock to my own holdings.
Buy the dip?
As a long-term investor, I don’t mind short periods of poor performance. So long as I’m confident in the quality of the businesses in my portfolio, I’m happy to keep holding, and may even buy more.
My approach seems to be a good fit with that of Scottish Mortgage’s soon-to-retire manager, James Anderson.
In a recent interview with the Financial Times, Anderson said he still believes finding “extreme winners” is the best way to invest. But he warned investors that this can involve “periods of pain”.
Profiting from big winners
Anderson’s approach is partly based on research showing there are only ever a handful of big stock market winners. Most shares never do anything much.
It’s a fair point. Some of the biggest stocks in the FTSE 100 aren’t worth any more than they were 10 years ago.
The problem is that trying to find these “extreme winners” isn’t easy. Take US pharma firm Moderna. The MRNA vaccine developer accounted for 7.1% of SMT’s assets at the end of March, making it the trust’s largest holding.
Moderna reported a $12bn profit in 2021, thanks to sales of its Covid-19 vaccine. But until the pandemic, this business had lost money every year since its 2016 flotation.
Demand for Covid-19 vaccines is easing. Will Moderna have more blockbuster products? I don’t know. But broker forecasts suggest its profits will fall from $12bn to $2bn by 2024. That makes it hard to value this business, in my view.
Scottish Mortgage share price: what I’m doing
At the end of April, Tom Slater will take over as manager of SMT when Anderson retires. The two men have worked as co-managers for years, so I expect a smooth changeover. But Slater will still have a tough job, in my view.
As the world continues to change, he’ll have to decide which of the trust’s big winners will continue to grow. At the same time, he’ll have to find new “extreme winners” to add to the portfolio.
I am tempted to add Scottish Mortgage shares to my portfolio. The trust’s investment decisions are based on in-depth global research, company meetings and industry access. I can’t do any of this, so investing in SMT would give me access to a whole sector of the global market that I can’t reach.
Despite this potential attraction, I’m not going to buy SMT shares. The reason for this is simply that the trust’s approach is too far out of my comfort zone.
I like to buy shares where I can understand the valuation and justify the price I’m paying. With SMT, I can’t do that. For this reason, I’m going to stay on the sidelines.