As a long-term investor, my focus is on the long-term performance of stocks. In that sense, I think Scottish Mortgage Investment Fund (LSE: SMT) has a lot going for it. Scottish Mortgage shares are down 37% over the past year.
But they are 56% higher in five years, more than 450% in five years, and 760% since the millennium. The trust’s track record goes back much further: The last time it cut its annual dividend was 90 years ago.
The past is not necessarily a guide to what will happen next. While Scottish Mortgage shares have been very profitable in the past, that may not be the case in the future. On top of that, as an investor I need to consider the potential risks associated with it before investing in stocks.
So how does Scottish Mortgage compare in my analysis?
The past is not a guide to the future, but it can still give us some clues about what might happen next!
As an investment fund, Scottish Mortgage employs fund managers to distribute its money among different companies. That offers me a number of potential benefits as an investor. Not only do I get exposure to a diversified portfolio by buying shares in the investment trust, but its managers are actively tracking stock markets around the world in search of the next big thing. They can spot great ideas that I myself would miss.
They are also looking beyond the stock markets. For example, the trust owns a stake in SpaceX that is not publicly traded, something I would have a hard time buying even if I wanted to.
Of late, that approach hasn’t worked so well, as evidenced by the sharp drop in Scottish Mortgage’s share value. One fund manager reportedly referred to 2022 as a “humiliating year” like holdings like tesla Y Shopify plummeted in value.
But I see it as the flip side of the trust’s strong performance in recent years.
Such success came from investing in promising growth stories early in its development. That worked fine for a few years. But as tech stocks have tumbled, so has Scottish Mortgage due to its heavy exposure to the sector.
Owning shares in a mutual fund can offer me diversification. Your funds can be distributed among dozens of companies, such as Scottish Mortgage.
But diversification itself is not a guarantee of positive returns. In fact, the fall in Scottish Mortgage shares reflects the fact that it has diversified into individual companies, but remains highly exposed to a few business sectors, such as technology and healthcare. That remains the case even after fund managers have reshuffled the portfolio in recent months.
I clearly see some risks here. Tech valuations could fall further, with a ripple effect for Scottish Mortgage shares.
Despite that, as a long-term investor, I am drawn to the long-term risk-reward proposition of buying the shares of the trust. If I had spare funds to invest today, that’s exactly what I would do.
Post-mortgage actions in Scotland could be rewarding. How is the risk? first appeared in The Motley Fool UK.
C Ruane does not have a position in any of the mentioned stocks. Motley Fool UK has recommended Shopify and Tesla. Opinions expressed about the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that Considering a wide range of ideas makes us better investors.
Motley Fool UK 2023