Scottish Mortgage Investment Trust (LSE: SMT) has had a poor start to the year. After its incredible 105% rally in pandemic-plagued 2020, the Scottish Mortgage share price is down 30% year-to-date (and 14% in a year). Yet the investment trust has been one of the UK’s top performers over the past decade.
So, why is it on a downward trajectory? And does this fall represent an opportunity for me to grab some cheap shares? Let’s take a look.
Why is the share price down?
So, why after such a strong performance, during a difficult few years, is the Scottish Mortgage share price now falling?
Firstly, the trust is renowned for its large weighting to growth stocks. Examples of these include Tesla, which SMT invested in back in 2013 when the shares were changing hands for around $6. And smart investments like these have been a big part to the large success seen by the fund. However, with global inflation on the rise, this trend tends to see investors switching their money to ‘safer’ value stocks. As a result, the share price has fallen.
Another reason for the fall is Scottish Mortgage’s tech-heavy focus. As of 31 March, its top holdings included Tesla, Nvidia, and Amazon. While these stocks have performed well in the past, 2022 has seen them suffer. The stocks are down 17%, 35%, and 16% year-to-date, respectively, so it’s no surprise that the Scottish Mortgage share price has followed suit.
Wider outlook
With this said, I think these are short-term concerns.
Management makes it clear that the trust has the “aim of maximising its total return to its shareholders over the long term” – and it uses the FTSE All-World Index as a five-year benchmark. While of course, past performance doesn’t represent future returns, in the last five years SMT has returned nearly 140% to patient shareholders. And on top of this, it survived multiple challenges over the years, such as the dotcom crash of 2000, highlighting its resilience.
There’s a case, however, to argue that the Scottish Mortgage share price may continue to fall. To start, its top holding Moderna (7.1%) is forecast to see profits fall from $12bn in 2021 to $2bn by 2024. And while Tesla has been enjoying big growth, its price-to-earnings ratio would suggest it’s seriously overvalued. A correction to this could see the Scottish Mortgage share price come tumbling down.
Despite this, the trust is in the safe hands of Tom Slater and soon-to-retire James Anderson, who have been at the helm for a long period, playing a key part in its success. I have confidence that their eagle-eyed investment style will allow the trust to continue to thrive in the future.
What I’m doing
So, regardless of short-term concerns, I think the falling Scottish Mortgage share price presents a great opportunity. The trust has proved it can survive difficult periods in the future. And despite its dip, I have faith in the management team to guide it. As such, I would buy the shares today.