Over the past few years, Scottish Mortgage Investment Trust (LSE: SMT) has rewarded shareholders handsomely. But recent performance has been less impressive. The Scottish Mortgage share price is down 20% over the past year. It has fallen steeply lately, losing 28% since I explained my bearish stance on the shares in late September.
After that sort of fall, could now be a good time for me to add Scottish Mortgage to my portfolio?
Positive points about SMT
First I think it is worth mentioning several things that I like about the company.
It has a stellar track record in identifying high-growth companies at an early stage in their development. Seizing such investment opportunities has been highly lucrative for SMT shareholders. Although the past year has been disappointing, the long-term results of the company’s investment strategy remain spectacular.
As well as that, the company has one of the longest runs of maintaining annual dividends with no cuts amongst UK companies. The trust last cut its dividend in 1933. The current yield of 0.3% does not excite me. But I do like the fact that, over generations, the company has demonstrated careful financial stewardship that has allowed it to maintain dividends.
My concerns about the Scottish Mortgage share price
If I think there is a lot to like about Scottish Mortgage, why am I not planning to add it to my portfolio even after the share price has fallen sharply?
In short, I think there could be further declines to come. SMT is basically a form of collective investment vehicle. It pools its shareholders’ funds and uses them to buy shares in a variety of companies. That would allow me to get exposure to unlisted companies I cannot buy in the form of shares, such as SpaceX. But it also means the SMT share price moves around broadly in line with what happens to its underlying investments.
The company’s heavy focus on tech and China in recent years paid off well for a long time. But tech shares are currently facing heavy selling in the stock market. Chinese tech shares in which SMT has a position, such as Tencent, have also had a challenging time lately. Tencent shares have lost 35% over the past year. The tech sell-off helps explains why the Scottish Mortgage share price has fallen. But it also makes me think that it could lose even more value in coming months. If the tech selling we have seen recently accelerates, that could hurt the company. Its price may fall further.
Why I am not buying
That is why I continue to avoid SMT and will not be buying it for my portfolio. Although I think it could show good returns again at some point in the future, for now I remain concerned that falls in the tech market could hurt its own valuation.
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
