It’s not that long since Scottish Mortgage Investment Trust (LSE: SMT) shares hit all-time highs. But a tech sell-off has hit the share price hard over the last three months and the price has fallen by around 30%. That’s painful for recent buyers of the shares no doubt. For longer-term holders though, it may be just a blip. The share price is, after all, up by a sector-leading 200% over the last five years. Its early investment in companies such as Tesla has — literally — paid dividends. Yet the shares could continue on their current cold streak.
Why could Scottish Mortgage keep falling?
As I recently pointed out, there are reasons to be wary of a further stock market correction or crash. The trust’s backing of a number of ‘jam tomorrow’ type stocks is an issue. They’re heavy on innovation but also are often unprofitable, or face increasing competition in hot, high-growth sectors. And they’ve felt the brunt of the recent market sell-off.
But inflation is probably the primary concern when it comes to why shares in Scottish Mortgage Investment Trust could keep falling. It doesn’t seem like something that’s going to go away soon – as much as central banks and economists might like it to.
There’s also an element of what goes up must come down. The share price rise during the pandemic was astronomical. The trust had a purple patch and so it’s only to be expected that a cold streak will occur – the key question is: how long might it last?
Also, as the trust holds Chinese tech companies such as Tencent (its sixth-largest holding), any renewed clampdown by the Beijing authorities on the sector will likely hit tech shares and the Scottish Mortgage Investment Trust share price.
Reasons for optimism
Yet it’s not all doom and gloom. As a long-term investor, I’m keen to think about where the share price might be in five years’ time rather than where it’ll be in five weeks’ time. Despite its recent drop – and the imminent departure of one of its key managers – Scottish Mortgage could still be a great investment. Most of the management team’s members are staying on to run the investments and they have a great track record of backing innovative listed and private companies from across the globe.
Another upside is the shares are now on a small discount to the net asset value (NAV). All being equal, this is a good thing. The shares often trade for more than the trust is actually worth – known as a premium.
So I like the Scottish Mortgage Investment Trust. I’ll ignore the shares for now just because I fear further stock market volatility, which could particularly affect tech stocks. To answer my earlier question I think there’s a real possibility the cold streak may continue for some time.
Overall though, if the shares fall and the discount increases, I’ll be tempted to buy the shares to add diversification and give me access to some of the world’s most innovative and exciting companies.
Andy Ross owns no share 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.
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