Can this FTSE 100 investment trust recover?
Understandably, investors in Scottish Mortgage shares will be disappointed with their recent performance. Indeed, only two other FTSE 100 stocks — Persimmon and Ocado — have fared worse over the past couple of years. But, the fund’s manager, Tom Slater, has a high tolerance for volatility. Adopting a long-term view, he believes the downturn could be the “unreasonable price” investors have to pay now for future returns.
Indeed, there’s a compelling case to be made for some of the trust’s key holdings. For instance, its largest position — Dutch company ASML — is the world’s only manufacturer of extreme ultraviolet (EUV) lithography machines. This technology is essential to make small, powerful AI chips. Via Scottish Mortgage shares, investors are gaining exposure to a growth sector offered by no other FTSE 100 stock.
The FTSE 100 trust’s second-largest holding, Moderna, is making strides to harness the power of mRNA technology beyond Covid-19 jabs. Candidate vaccines for RSV, influenza, and cytomegalovirus make for a promising pipeline. The third-largest position, Tesla, needs no introduction. As the world moves towards a greener future, electric vehicles could become an enormous market.
But, for all of these companies and other growth stocks in Scottish Mortgage’s portfolio, the macroeconomic context matters. Tightening monetary policy, the rising cost of capital, and the risk of recession all point to a difficult future for the FTSE 100 investment trust’s strategy. After all, many of the stocks it invests in aren’t cheap using traditional valuation metrics, even after falls from their pandemic highs.
Having said that, Scottish Mortgage shares trade at a wide discount to the portfolio’s net asset value currently. This suggests that today could be an attractive entry point. For investors who subscribe to the FTSE 100 trust’s philosophy and can stomach volatility, the shares could justify a Buy rating as long-term holds.
