I have been consistently bullish about the outlook for the Scottish Mortgage Investment Trust (LSE: SMT) over the past couple of years. However, considering its recent performance, I have been starting to wonder if I have made a mistake with the SMT share price.
I should note that my recent thoughts are not based on the performance of the stock price alone. Just because shares in a company are falling does not necessarily mean it is a bad investment.
Instead, I am starting to question my decision based on the company’s allocation towards Chinese equities and high-flying growth stocks.
Fall from grace
Last year, the SMT share price surged as the company’s exposure to high growth tech stocks pushed its net asset value to new highs.
Over the past couple of months, the share price and the corporation’s net asset value have gone into reverse. Over the past year, shares in the trust have fallen 14%, and the net asset value is down 13%.
The trust’s approach to investing has always been to take prominent positions in the companies it believes have the best growth prospects. This strategy can generate significant returns, although it also has a downside. Managing a concentrated portfolio can lead to high levels of volatility. That is precisely what we are seeing today.
What’s more, growth investing is a challenging game. Investors and managers need to get in early to generate the best returns. This can mean they end up buying firms at excessive prices. It can also lead to losses if they do not meet their lofty growth expectations.
SMT share price headwinds
I think this is precisely what is happening today. Three of the top five holdings in the portfolio are Moderna, Tesla and Tencent. Each one of these companies is suffering from its own problems.
Moderna’s growth is not living up to the market’s lofty expectations. Tesla’s output is expanding, but the company’s regulatory issues are causing angst among investors. Meanwhile, Tencent faces growing pressure from Chinese regulators, who want the enterprise to deprioritise profits and invest more in society.
Still, while these companies seem to be facing short-term headwinds, I think they still have fantastic long-term potential. Unfortunately, it looks as if the shares got ahead of themselves last year, and investors are now paying for this optimism.
I think the SMT share price will likely remain volatile for the foreseeable future. However, this company has a long track record of finding unique growth opportunities. Its managers are not particularly bothered about performance figures over the next year or so. They are looking for companies that will grow for the next 10 or 20 years.
As such, I do not think I have made a mistake here. As a buy-and-hold investment, I still believe the trust is one of the best investments to own for exposure to international growth equities.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.
