Scottish Mortgage Investment Trust (LON: SMT) share price has been in a strong downward trend in the past few months. The stock dropped to a low of 640p, the lowest point since May 4. It has plunged by ~57% from its highest point in October 2021. The stock has underperformed the FTSE 100 index and the Ark Innovation Fund (ARKK).
Scottish Mortgage vs FTSE 100 vs ARKK
Scottish Mortgage is a leading investment trust with over £13.39 billion in assets. The fund invests in technology companies from around the world. Most of its portfolio companies are from North America followed by Europe and Asia. A small portion of its portfolio companies are from South America.
Scottish Mortage has a stake in 99 companies, with most of them being publicly traded. 29.9% of its portfolio is in private companies, which are a bit difficult to value. Its biggest companies are market leaders in key industries.
For example, Moderna is a leading company that is developing mRNA vaccines. Its pipeline is made up of vaccines to treat illnesses like flu, cancer, and HIV, among others. If the company succeeds, it will be targeting diseases with a total addressable market worth billions of dollars.
Further, Scottish Mortgage has a large stake in ASML, a Dutch company that is pivotal in the semiconductor industry. The firm manufactures lithography products that are used by most semiconductor fab companies like TSMS and GlobalFoundries.
Other large SMT constituent companies are Tesla, MercadoLibre, SpaceX, Illumina, and Kering. Also, the fund has a stake in ByteDance, the parent company of TikTok. In all, the top 30 biggest companies in the fund account for about 78% of its total portfolio value.
Is Scottish Mortgage a good investment?
In my recent article on Scottish Mortgage, I argued that investors should avoid the fund. I cited its use of leverage, rising interest rates, and the fact that it has a high exposure to illiquid assets like SpaceX and ByteDance. Instead, I recommended investing in Invesco QQQ, which tracks the Nasdaq 100 index.
This is not to say that SMT is a bad investment. Instead, I believe that QQQ’s passive investments in highly liquid assets is a better approach for most investors.
Scottish Mortgage seems a bit undervalued, which explains why several hedge funds have started to close their short bets. There is a view that the worst is behind it and that the stock is about to bottom. For one, technology stocks are doing well, with the Nasdaq 100 being in a bull market.
At the same time, there are signs that central banks are nearing the end of their hiking cycle. As I wrote earlier, the Reserve Bank of Australia paused its hiking phase. There is also a likelihood that the Fed will pause in the coming months. As such, this could lead to more inflows to tech companies.
Therefore, there is a likelihood that the SMT share price will crawl back in the coming months. If this happens, Scottish Mortgage share price could rise to about 800p, the highest point on February 2. Still, I would recommend investing in a conservative and cheap fund like QQQ. In a recent note, Chrispin Odey warned that:
“It’s got problems and it’s very expensive still and of course they’ve got quite a lot in private equity ventures, tech ventures, which is dangerous — they all demand rights issue after rights issue. So the percentage in unquoted stocks will keep on going up and people will get scared.”
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