Scottish Mortgage (LSE: SMT) shares have been suffering in 2022, and are down almost 40% year-to-date. This poor performance comes after a meteoric 105% rise in 2020, which really put Scottish Mortgage on the map.
Broadening the returns horizon to 12 months, the shares are down over 36%. For comparison, the investment trust’s benchmark, the FTSE All-World Index, is up 4.8% over the past year. Does this fall in price mark the perfect opportunity for me to buy Scottish Mortgage shares? Or should I steer clear of this FTSE 100 high-growth fund?
The lowdown
In order to understand the fall in Scottish Mortgage shares, it’s important to understand the types of companies that the trust holds. Trust managers Tom Slater and Lawrence Burns strive to own high-growth companies that can generate healthy returns over a five-year minimum period. This methodology has led them to concentrate heavy holdings in tech growth stocks. For example, the trust’s top five holdings at the time of writing are Moderna (6.5%), ASML (6.4%), Illumina (6.3%), Tesla (6.2%), and Tencent (4.9%).
The reason why Scottish Mortgage shares have been falling is due to rising inflation and interest rates. These are weighing down on the high valuations that growth stocks experienced in 2021. When inflation rises past government targets, central banks raise interest rates to slow down economic growth. When this process occurs, investors sell out of riskier positions such as the growth stocks outlined above.
In addition to this, SMT’s Chinese holdings have been facing some pretty strict regulatory tensions. Managers announced in its March annual report that the build-up of Chinese positions may not have been the smartest choice. This is another explanation for the trust’s poor performance.
Long term focus
Rising interest rates do pose a threat in the short to medium term for companies that Scottish Mortgage Trust targets. However, this factor may be irrelevant in the long term. As mentioned, the firm looks to “add value over five-year time frames, preferably much longer”. The historical share price lends credence to this, rising over 150% in the last five years, outperforming the benchmark by 85%. While past performance is no indicator of future returns, these figures do highlight to me the trust’s stellar management. With growth stock valuations down across the board, I think now could be a good time for me to open a position in the trust for long-term growth.
The verdict
Overall, I think that Scottish Mortgage shares could slide further in the short term as interest rates continue to creep up and Chinese regulatory risks intensify. However, I am confident in the fund’s management and think that over a long-term time horizon, these short-term pressures will leave negligible impacts on returns. Therefore, at their current low price, I am seriously considering buying Scottish Mortgage shares today.