I think investment trusts make great investments any time. But I reckon they’re especially valuable when the economy is uncertain and stock markets are erratic. Right now, I’m wondering whether to buy Scottish Mortgage Investment Trust (LSE: SMT) for my portfolio, and I’ll tell you why.
Firstly, a single purchase of an investment trusts gets me diversification across all of its holdings. And then, as I’m a part-owner of the company, there’s no management-versus-customer conflict of interest. Those reasons, plus its dividend record, led me to buy City of London Investment Trust. So why am I now thinking of adding Scottish Mortgage?
I do love the names of some of these venerable investing institutions, even if I wouldn’t buy just for that. And Scottish Mortgage has nothing to do with mortgages, nor Scotland. No, it’s the UK’s largest investment trust with a market cap of £15.6bn. And it invests in global stocks, with US growth companies figuring strongly among its top holdings.
For me, it would provide balance. I’d have my UK-focused City of London, with its strong and progressive dividends. And Scottish Mortgage would add US and international growth stocks, including the likes of Moderna and Tesla, to my mix.
Trading at a discount
Scottish Mortgage Investment Trust shares are on a discount of 2.8%. So the share price is a bit lower than the value of the underlying assets. Does that mean it’s a bargain? Not necessarily. The thing is, some of the assets owned by the trust are themselves on very high valuations.
Tesla shares, for example, are on a trailing price-to-earnings of nearly 300. And that brings tears to the eyes of the low-risk dividend investor in me. If that proves to be unsustainable, getting it for a small discount would hardly qualify as a bargain. Then again, I’m the same investor who thought Amazon shares were overvalued 20 years ago. And of any money I invest in Scottish Mortgage, only around 6% would be in Tesla anyway. So there’s diversification safety there.
The share price has fallen hard
And the Scottish Mortgage share price has been tumbling. Since a peak in November, the shares have lost 31%. And over the past 12 months, they’re down 17%. But before I see that as a super bargain and rush in, looking back a bit further paints a different picture. The stock soared throughout the Covid-19 crisis. Even after the latest fall, it’s still up 83% over two years. And it has trebled over five years.
I could look at the dividend, which has not been cut since 1933. But then, the yield only stands at 0.3%. So it’s not really a stock for income investors.
Buy Scottish Mortgage Investment Trust?
The question is, taking account of all this, will I buy? The simple answer, right now, is no. Scottish Mortgage has a decades-long track record of investing in growth stocks, and has picked some great startups over the years. So I might well be missing big profits in 2022.
But for now, I can’t help seeing the share price fall as a needed correction. And I fear there could be further losses to come as investor sentiment moves back toward unloved Covid-trashed stocks. I expect I’ll come back to SMT in the future, though.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alan Oscroft owns City of London Inv Trust. The Motley Fool UK has recommended Amazon and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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