After a strong decade, the past year has been a rude awakening for shareholders in Scottish Mortgage Investment Trust (LSE: SMT). The Scottish Mortgage share price has tumbled 44% in 12 months. It is 55% down on the high price it hit in that period.
Now that the share price has halved, can it recover – and double my money in the process, if I choose to buy the shares for my portfolio today?
What goes up
The old saying “what goes up must come down” is not a good basis for investment decisions, in my view. Some things go up and show no sign of coming down any time soon. But the opposite is definitely not true – just because a share price goes down does not mean it will go back up again in future. Even a very cheap looking share can still get cheaper.
In the case of Scottish Mortgage, the reason for the fall is explained by the nature of the firm. It is an investment trust, meaning that it invests money in a range of companies. I see that as a potential benefit for me as a private investor. It offers me more diversification than I could easily manage using my own limited funds. It can also give me exposure to unlisted shares such as those of SpaceX, which Scottish Mortgage holds. But it does mean that swings in the value of the underlying assets will typically affect the Scottish Mortgage share price.
It is heavily exposed to the tech sector. In the past few months, leading tech shares have seen their prices fall. Scottish Mortgage’s top five holdings include names such as ASML, down 30% in the past year, and Tencent, down 37% in the same period.
Could the Scottish Mortgage share price recover?
If a key reason for the Scottish Mortgage share price collapse has been a decline in tech valuations, does that mean that the share price could recover if tech stocks start to do well again?
In principle it does. Tech remains a key part of the trust’s portfolio. So if the price of tech shares it owns recover lost ground, that should help Scottish Mortgage.
But right now I do not see any particular driver for that to happen. Tech share price falls reflect a worsening global economic outlook and concerns that valuations had got too high. I think such pressures remain in the front of many investors’ minds. So I do not expect a sudden tech rally taking key tech stocks back to their previous peaks. Therefore, I do not expect Scottish Mortgage shares to double any time soon.
Potential buying opportunity
if tech shares do recover even partially over time, however, that could mean the Scottish Mortgage share price moves up from its current level. In the long term, I remain bullish about customer demand for many leading tech companies. The trust also invests in other areas, such as pharma, and has a good track record of picking promising investment opportunities at an early stage.
On that basis, I would consider buying and holding the shares in my portfolio for the long term. But I would not do so expecting them to move up in the coming year as much as they have fallen in the past one.