Why are investors enthusiastic over the Scottish Mortgage Investment Trust (LSE: SMT)? Well, the name doesn’t give much away. But the SMT share price has more than doubled over the past five years, so there must be something good.
It’s all down to the shares the trust invests its money in.
Baillie Gifford’s flagship investment trust invests globally, and includes a number of US growth stocks among its holdings.
Growth stocks can be risky, and many investors try to get in and out for quick profits. That can lead to volatility, which puts me off the strategy. But I reckon the Scottish Mortgage approach could help even out the risks.
Long-term outlook
Baillie Gifford says of the trust: “We look to add value over five year time frames, preferably much longer. We don’t see that we can add much more than anyone else in the short term“.
I like that, especially the acknowledgement that they can’t do much in the short term. I find it refreshing when so many investment companies rarely look beyond the next quarterly results, and end up churning their investments and racking up costs just for short-term shine.
So what growth assets lie behind the SMT share price strength? Let’s look at the trust’s top five holdings as of 31 March (taken from the Baillie Gifford website).
Top five holdings
| Rank | Stock | Holding | 5Y growth |
| 1 | Moderna | 7.1% | +670% |
| 2 | Tesla | 6.6% | +1,300% |
| 3 | ASML | 6.4% | +320% |
| 4 | Illumina | 6.4% | +61% |
| 5 | Tencent | 4.2% | +38% |
Those are mostly high-flying stocks, and a couple of them have been even higher and fallen back.
Moderna is a notable one, with its shares breaking $450 at their peak, then dropping back to today’s level of around $140.
And Tencent has fallen more than 50% since its 2021 peak.
The SMT share price itself meanwhile has gained 135% over the past five years. But what makes me think it might be one to buy now?
It’s a couple of things. By spreading its cash over a diversified portfolio of stocks, the trust reduces the risk of me buying just one or two of them individually.
I’m also drawn to the current valuation. Today’s SMT share price stands at a 3.6% discount to net asset value (as of 26 April). That’s with the shares at 875p, while in October 2021 they were up at 1,568p.
Back then, I do think we were looking at a growth share bubble. Investors presumably liked the diversification and the hoped-for risk reduction. But even an investment trust can become as overheated as some of the stocks it invests in.
SMT share price value
After a 30% fall over the past 12 months, I see the SMT share price today as good value. It’s not bargain basement cheap mind, not after its five-year gains. And it does still carry the risks associated with its big growth share constituents.
Tesla, for example, is on a trailing P/E of around 180. Gulp!
But as an alternative to exposing myself to an individual US growth stock, I think Scottish Mortgage is a buy. I might allocate one slot in my portfolio to it.