Scottish Mortgage Investment Trust (LSE: SMT) shares have fallen a whopping 36% so far in 2022. The main reason for the drop is rising inflation and subsequent interest rate hikes, which have weighed on stock market valuations. Over a 12-month period, the situation looks even bleaker, with the shares falling just under 40% in value. With inflation still on the rise, is now the time to buy this stock? Let’s find out.

A rocky road

Red hot inflation has been a key market trend in 2022. With UK inflation reaching 10.1% in July and predicted to rise to over 18% by January, the situation looks pretty grim. Interest rates have been hiked to 1.75% in the UK in an effort to curb rising prices. This is putting severe pressure on growth stock valuations, which is very bad news for Scottish Mortgage. This is because the trust’s holdings are primarily focused on exactly this type of asset.

For example, the trust’s top three holdings are Moderna (8.3%), Tesla (6.7%), and ASML (6.6%). All of these stocks fit into the high-growth stock category and have exhibited high volatility so far in 2022. As interest rates continue to rise, and markets become increasingly uncertain, Scottish Mortgage shares could be in for an ongoing bumpy ride.

Another reason why the shares have suffered is pressure from Chinese regulatory authorities on US-listed Chinese companies. This has sparked the threat of potential delisting, which has vastly reduced investor confidence. Companies like NIO (which makes up 2.9% of Scottish Mortgages portfolio) have seen their shares tank on the potential of being delisted from the NYSE.

Reasons I like the stock

So why do I like the trust? For starters, at 829p, the shares are much cheaper than they were a year ago. In addition to the lower price, I adopt a longer-term outlook when looking at shares. Baillie Giffords’s flagship trust looks to “add value over five-year time frames, preferably much longer”. So, maybe I should discount the upcoming short-term volatility and look further into the future. Although past returns are no indication of future performance, Scottish Mortgage’s 606% 10-year return – compared to a 231% return for its benchmark the FTSE All World Index – highlights the stellar management of the trust.

In addition to this, being an investment trust, it allows me access to a bundle of assets in different industries, all under one investment. This is great for reducing my portfolio’s risk level. It also allows me access to non-listed companies, like Elon Musk’s SpaceX, in which Scottish Mortgage owns a £430m stake.

Am I buying?

I think that in the short term, Scottish Mortgage shares could face more volatility. However, here at The Motley Fool, we’re long-term investors. I think that under £9, the investment trust shares could land me some healthy returns over a broader time horizon – say 10 years. For that reason, I’m seriously considering adding this stock to my portfolio at today’s price.

The post Scottish Mortgage shares are down 36%: should I buy now? appeared first on The Twelfth Magpie.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding 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.

The story so far

To understand why the stock has fallen, we must cast our minds back to the height of the Covid-19 pandemic. In an effort to remedy the economic shutdown, central banks across the world poured billions into economies to keep them afloat. At the same time, the virus disrupted supply chains. This meant there was less supply, but people had more money (on a macro scale) to spend on the same goods. The result of this – rising prices.

Fast forward to 2022, and inflation has been reaching sky-high levels. To make things worse, the tragic Russia-Ukraine crisis has sent energy prices soaring, adding to inflationary pressures. Now central banks are faced with a new task: to slow down rising prices. They do this by increasing interest rates.

When interest rates increase, investors withdraw their money from higher-risk, speculative assets like growth stocks, and put them into safer assets. This is because they can earn a better risk-free rate. Interest rates in the UK and US have been on the rise recently, the former sitting at 1.75%.

Scottish Mortgage’s main holdings are exactly the type of stocks that are being negatively affected by this kind of market. For example, its top two holdings Moderna (8.3%) and Tesla (6.7%) have fallen 39% and 28% so far in 2022. Many analysts are predicting inflation to keep rising, which likely means that rates will too. If this does happen, it would be bad news for Scottish Mortgage shares.

A long-term play

Here at The Motley Fool, we are long-term investors. That means picking quality stocks and holding them for up to 10 years. Scottish Mortgage operates with the same thesis. It looks to “add value over five-year time frames, preferably much longer” and explicitly states that it doesn’t “add much more than anyone else in the short term”. So, perhaps I should be discounting the current volatility, and be operating with more of a long-term view, trusting the fund’s management.

I only have to check on the trust’s previous returns to see this management in action. Over the last five years it has returned 118%, and over the last 10 years, a whopping 606%. This vastly outperforms the FTSE All World Index, which is the stock’s benchmark.

Am I buying?

I’m not buying just yet though. I think in today’s macro climate, a growth-focused trust is too risky for me. However, I will be keeping this stock on my watch list as I think it could have the potential to yield some big returns over a 10-year span.

The post Are Scottish Mortgage shares a bargain at 822p?             appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood 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.

However, last week the shares experienced an encouraging 5% jump in value. Currently sitting at 774p per share, down almost 50% from its all-time high, is now the time for me to add Scottish Mortgage stock to my portfolio?

Why the trust has underperformed

The main reason why Scottish Mortgage shares have underperformed this year is the nature of the stocks it holds. The trust targets high-growth companies and aims to hold them for a minimum of five years to generate healthy returns. This strategy has worked well in the past, highlighted by an impressive 585% increase in the share price over this period.

However, 2022 has been characterised by rising inflation and interest rates. Rising rates put big pressure on the valuation of growth stocks, which soared in 2020 and 2021. This has caused investors to pull out of growth stocks and pour into safer value stocks. The performance of Scottish Mortgage’s top holdings has taken a hit accordingly. For example, Tesla (5.7%), NVIDIA (2.5%), and Tencent (5%) are down 37%, 47%, and 21% year to date. Although Tesla is up 9% over the past 12 months, Nvidia and Tencent are down 22%, and 34% respectively.

A buying opportunity?

2022 has proved a tough year so far for Scottish Mortgage shares. However, this volatility may only be a flash in the pan in the long run. As mentioned, the trust looks for value over a minimum five-year period – preferably longer – and its healthy past returns show the exceptional execution of this thesis. Therefore, perhaps I should be discounting the current volatility and adopting a broader outlook?

This situation seems especially prevalent in China, where Scottish Mortgage has about one-fifth of its holdings. Recently, Chinese stocks listed in the US have taken a hit due to tough regulatory rules. However, China is still a rapidly-growing economy, and having such a large stake in this growth could pay dividends in the long run.

Another positive about the fund is that it gives me access to a wide portfolio of companies all under one investment. In addition to this, I also get access to unlisted companies, like SpaceX, in which the trust holds a large position.

What I am doing now

Overall, I think that at 774p, Scottish Mortgage stock could be a great addition to my portfolio. Yes, there’s some short-term volatility that has beaten down the share price, but in my eyes, this offers me a chance to grab shares at a discount. The diversification and access to unlisted companies are big pluses too. Therefore, I’m seriously considering adding a position to my portfolio soon.

The post Are Scottish Mortgage shares good buys at 774p? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood 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.

Scottish Mortgage Investment Trust (LSE: SMT) shares have performed poorly so far in 2022. They are down 46% year to date, and over the last 12 months, they have fallen 43%. The main reason for the fall is rising interest rates, which were raised by the US and UK central banks on Wednesday to control inflation. The Scottish Mortgage share price slumped 8% on the news.

Reasons for the share price fall

The Federal Reserve announced yesterday that it is hiking interest rates by 0.75% to a range of 1.5% to 1.75%. The Bank of England announced a similar rise in rates to 1.25%. These hikes have been made in an effort to control record inflation levels. When interest rates go up, investors can earn higher returns on safe assets, and hence they turn away from high-growth stocks.

The bad news is that Scottish Mortgage Investment Trust holds exactly the type of assets that people tend to sell during this kind of market volatility. For example, the fund’s top three holdings as of the end of May were Moderna (7.4%), ASML (6.7%), and Tesla (5.7%). All of these stocks have fallen over 5% on news of rates being hiked.

The Fed predicts that rates could climb as high as 3.4% by end of 2022. If this is the case, then I expect Scottish Mortgage shares to struggle to gain any momentum throughout the rest of the year.

The investment trust’s performance has also been tainted by strict Chinese regulations. Since late 2020, the Chinese government has been cracking down on the tech sector in an attempt to curb the monopolistic power of some of its biggest firms. Scottish Mortgage had been building up positions in many of these companies. It announced in its annual report that this strategy was likely a mistake.

Long-term vision

Interest rates and Chinese regulation do pose serious short-term threats to Scottish Mortgage shares. However, the trust’s investment strategy looks to “add value over five-year time frames, preferably longer”. This means finding quality growth companies and investing in them with a long-term outlook. The fund’s performance backs up this methodology, generating 150% returns over the past five years. Past performance is no indication of future returns; however, this does highlight the fund’s exceptional management.

Therefore, perhaps I shouldn’t be worried about short-term volatility and take more of a long-term outlook on the shares. What’s more, growth stocks are starting to fall back from the sky-high valuations seen in 2021. The trust could start to pick up some shares at bargain prices, leading to high growth in years to come.

Would I buy the shares?

Overall, I think that Scottish Mortgage shares could fall lower over the next few months. Both the Bank of England and the Fed have predicted more rate hikes, and I think this will push growth stock valuations lower. Therefore, I won’t be buying the stock today but will be keeping it on my watchlist.

The post Here’s why Scottish Mortgage shares fell 8% yesterday appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding 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.

Declines are difficult to bear

Seeing a company’s share price plunge deep into the red is never a pretty sight. Unfortunately, the trust’s investors had to bear with losses of up to 45% at one point. So, what’s behind the monumental drop in share price? Well, the Scottish Mortgage portfolio holds an abundance of growth names. The top 10 holdings alone have an average price-to-earnings (P/E) ratio of 37, which is more than twice the S&P 500‘s P/E ratio of 16.

Growth stocks suffer the most when interest rates rise, as has been the case due to sky-high inflation. As a result, spending is expected to decrease due to higher borrowing costs. As growth stocks get their valuations from future cash flows, a slowdown in future spending slashes their valuations.

To make matters worse, China’s zero-Covid policy has led to several lockdowns in big cities. These lockdowns have had an impact on several of the FTSE 100 trust’s top Chinese holdings. Consequently, the Scottish Mortgage share price has suffered a decline from its biggest investments.

Trust and hope

That being said, Scottish Mortgage saw its share price rebound last week. This was down to a generally positive set of US economic data. Consumer spending figures were rather upbeat, and minutes released from the Fed meeting eased fears of a 0.75% rate hike. But most importantly, the core price consumption expenditure (PCE), the Fed’s preferred index for measuring inflation, pointed towards inflation peaking in April. This led to one Fed official suggesting that the central bank could even pause rate hikes in September. Officials from China also mentioned plans of lifting lockdowns which sent many of the portfolio’s Chinese stocks rallying, positively impacting SMT shares.

Unstable foundations

While Scottish Mortgage shares present a tremendous amount of upside, it also comes with plenty of risks. Since its remarkable one-week recovery, oil prices have shot back up to the $120 per barrel mark. Given that the main cause of inflation has been high oil prices, an EU ban on Russian oil imports, along with the reopening of the Chinese economy, isn’t going to drive inflation down anytime soon.

Moreover, although China has began lifting its lockdowns, there’s no certainty that a similar episode won’t happen again in the future. Therefore, I’m doubtful that the fund is completely out of the woods for a turnaround. The Chinese government’s ability to manipulate share prices of its local companies also presents too big of a risk to me. Thus, I won’t be looking to invest in SMT shares anytime soon. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more stability.

The post Could the Scottish Mortgage share price be about to turn around? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

John Choong has no position in any of the shares mentioned at the time of writing. 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.

Interest goes both ways

Scottish Mortgage was started as a mortgage-based fund, but has since transitioned to a heavily tech-based fund. This transition brought investors monumental returns from the tech boom during the pandemic. However, its share price has since fallen 40% from its all-time highs due to the underwhelming recent performance of those big tech names. This list includes the likes of Netflix, Zoom, Shopify, and many other growth stocks.

The reason for the heavy decline can be attributed to inflation and the rise of interest rates. The consensus is that when interest rates rise, growth stocks tend to suffer. This is because growth stocks have higher valuations based on future cash flows. High interest rates tend to slow economies down with the aim of suppressing consumer spending. As a result, growth companies are then expected to receive reduced cash flows which end up cutting their future valuations. This results in investors losing interest in those companies.

Upon assessing the Scottish Mortgage portfolio, it’s notable that the majority of its investments have seen monumental declines since the year began. Its biggest holding, Moderna, has seen its share price plunge 65% from its all-time high. The trust’s second-largest holding, Tesla, has also seen its share price suffer lately despite surpassing production estimates.

Locked down profits

The top holdings within Scottish Mortgage Trust include heavy investments in biotech, technology, and logistics. Within those names, the fund has a heavy allocation to China. As such, investors who want exposure to China can do so by investing in Scottish Mortgage as a close substitute. The FTSE 100 fund holds positions in Tencent, Alibaba, and even TikTok’s parent company, Bytedance.

As an emerging market, China’s growth is unprecedented, but its zero-Covid policy and authoritarian tendencies have seen many of its companies lose huge chunks of their valuations. The latest lockdowns in Shanghai and Beijing haven’t helped the Chinese investment case either. With three of Scottish Mortgage’s top holdings being Chinese-based companies I expect its share price to continue underperforming in the near term.

Trust in Scottish Mortgage Trust?

But has trust run dry in Scottish Mortgage Trust? I’d argue not. The flagship fund is managed by Baillie Gifford, one of Britain’s most popular fund managers. The firm has an excellent track record of producing stellar returns and I reckon that this is just a pit stop on a road to larger returns. For young investors like myself, the current bear market presents buying opportunities.

The current Scottish Mortgage share price is trading at a price-to-earnings (P/E) ratio of two. So, this could be a suitable entry point to buy the dip. Nonetheless, I feel the risks associated with investing heavily in Chinese stocks outweigh any potential returns. Therefore, I’m not planning to invest in Scottish Mortgage shares for the foreseeable future.

The post Here’s why the Scottish Mortgage share price is down 25% appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

John Choong has no position in any of the shares mentioned at the time of writing. 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.

But over the past few weeks, the price has experienced a significant tumble of 30%. What caused this price collapse? And is this a buying opportunity for my growth portfolio? Let’s take a look.

Growth stocks are driving the Scottish Mortgage share price

The core business model of Scottish Mortgage is to invest in companies on the stock market and then reward its shareholders with the profits it generates. This means that its share price is primarily driven by the underlying performance of the companies it owns.

The top five positions within its portfolio today are Tesla, Amazon, Illumina, Tencent Holdings, and NIO. In 2020 all of these stocks saw explosive growth. But recently, they haven’t been doing so well. As far as I can tell, the market, in general, has been falling for a few weeks due to the concerns surrounding rising inflation. Why does this matter? Let me explain.

How inflation affects stock prices

Inflation can have a complex effect on the stock market. But generally, when it increases, so do interest rates. This makes fixed-rate bonds looks significantly less attractive to their variable-rate equivalents. And so money is moved out of the first and into the latter (or into other low-risk higher-yielding investment instruments).

But as a consequence, fixed-rate bond yields begin to increase as well. This is precisely what happened with the 10-year US Treasury bond, whose yield doubled within the space of six months. Subsequently, the higher payouts begin to attract additional investors, including those currently invested in the stock market.

When this happens, growth stocks tend to be the ones that get sold off first. Why? Well, without going too far off the beaten track, when inflation rises, the net present value of future cash flows falls. Put simply, the value of the expected future returns of a stock loses value. And so shares with high valuations, like those in Scottish Mortgage’s portfolio, begin to look even more expensive.

Is this a buying opportunity?

The fall in Scottish Mortgage’s share price doesn’t concern me. Even after this crash, it’s still up around 90% on a year ago. And the companies in its portfolio look to have strong prospects that could drive it higher. But that doesn’t mean there aren’t any risks to consider.

Many of the stocks in the portfolio have absurdly high valuations driven by shareholder expectations. For example, Tesla, which is 9% of the portfolio, is currently trading at a P/E ratio of 1,080! Needless to say, if Tesla fails to perform, its share price could come crashing down and significantly impacting Scottish Mortgage in the process.

Investing in high-growth stocks undoubtedly carries an increased level of risk. And there’s no way of knowing when the fears surrounding inflation will cease. But overall, even with the elevated risk level, I feel the recent drop in share price looks like a good opportunity to add the firm to my growth portfolio.

The post Why has the Scottish Mortgage share price crashed? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Zaven Boyrazian does not own shares in Scottish Mortgage Investment Trust. 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.

Global equity

The Scottish Mortgage Trust (LSE: SMT) is, in my opinion, one of the best investment trusts to invest for global equity exposure. The £6.5bn flagship Baillie Gifford investment trust invests in both developed and emerging economies, giving its fund manager wide scope to select his best investment ideas.

James Anderson, who has been managing the fund since 2000, likes to maintain a concentrated portfolio of his high-conviction picks. It’s no surprise then that the top 10 holdings accounted for more than half its total assets, while the total number of holdings was 78. This included 42 unlisted companies, which in aggregate accounted for 14.6% of the portfolio.

Impressive performance

Over the past five years, the company has delivered impressive total net asset value (NAV) returns of 171%. That’s more than double its benchmark FTSE All-World Index performance of just 79% over the same period.

It’s clear that the fund has generated this outperformance thanks to its strong preference in technology stocks, which together account for nearly 29% of its assets. On the downside, while this sort of sector-heavy exposure has reaped significant rewards in the past, it also makes the fund vulnerable to a tech sell-off, like the one taking place right now.

But despite its historic outperformance, fees for investing in the fund are surprisingly low, with an ongoing charges figure of 0.44%. Fund fees are sometimes the best predictor of future returns, and it’s particularly important to choose a fund with low fees when you’re investing over a long period of time, as compounding means the costs really add up.

Picking winners

Another fund I’d consider buying for the next decade is Baillie Gifford Shin Nippon (LSE: BGS), an investment trust which focuses on small Japanese companies.

The fund has a really strong track record of picking winners. Over the past five years, Shin Nippon has produced a total NAV return of 278% — a little under two-and-a-half times its benchmark MSCI Japan Small Cap Index’s performance of 113% over the same period.

New Japan

Shin Nippon, which means ‘new Japan’, has achieved this outperformance by focusing on small, fast-growing Japanese companies with innovative business models and dynamic management teams. These companies have recently performed really well due to attractive growth prospects and supportive government policy towards deregulation, outsourcing and promoting entrepreneurship.

Moreover, the limited broker coverage of Japanese small-caps has also added to value which has been created by its in-house research team.

The one downside of this fund is its higher costs. With an ongoing charges figure of 0.89%, it charges just over double the cost of holding the much larger Scottish Mortgage Trust. Still, I believe that this may be a price worth paying in order to invest alongside a highly successful specialist team which has had a long and impressive track record of success. 

The post 2 top investment trusts I’d buy and hold for the next decade appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Jack Tang has no position in any 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.

Big and beautiful

Launched in 1909, the strangely-named Scottish Mortgage is one of the small breed of venerable investment trusts that has been investing in global companies for a century or more, along with the likes of Foreign & Colonial (1868), Witan (also 1909) and Monks (1929). Far from living in the past, the investment trust is very much one for today, with top holdings including Amazon, Tesla, Facebook and Ferrari, as well as whizzy Chinese social media companies Alibaba and Baidu.

Star fund manager James Anderson overhauled the trust’s investment strategy to allow up to a quarter of its portfolio to be invested in unquoted smaller companies, a move that quickly paid off, with a 40% jump in the last 12 months. It has returned a whopping 172% over five years, against just 25% on the FTSE 100, and 83% on its global index benchmark, according to Trustnet.com. That is a remarkable return from a fund behemoth with a current market capitalisation of £4.7bn. Who said small is beautiful? Big can be just as lovely.

Keeping up with the Smiths

Terry Smith at Fundsmith Equity, currently the UK’s most popular fund manager, is winning all the plaudits these days but even he is trailing Scottish Mortgage after returning ‘just’ 163% over the same period. Investors will be hoping that Scottish Mortgage fares better than the previous three investment trusts to hit the FTSE 100. Edinburgh was a founder constituent in 1984 but within six months was gone, never to return. Foreign & Colonial put in a similarly fleeting appearance in 2009. Alliance Trust lasted from 2008 to 2011, but was then relegated for poor performance.

Nothing lasts forever. Maybe Scottish Mortgage will also suffer an attack of vertigo, but right now the Baillie Gifford-managed fund is looking canny. This is a truly global fund, with almost half its assets in North America to benefit from barnstorming US growth. It has a weighting of just under 20% in each of the eurozone and China, where fortunes have been more mixed.

The Scottish play

It has limited UK exposure, with just 3.7% of the fund invested here. This could make it a handy diversification tool for investors wanting to spread their wings beyond the UK. It means you do not have to worry about the impact of Brexit, with the vast majority of the fund’s earnings generated overseas it has benefitted from recent sterling weakness.

However, performance could suffer if the Trump reflation play disappoints or Brexit fears prove overdone and the pound makes a sterling recovery, reducing the value of those overseas earnings. Another minor downside is that it trades at a premium of 3.3% to net asset value, although this is always a sign of success. The yield is just 0.85%, making this a long-term growth play rather than an income generator. So a hearty welcome to Scottish Mortgage, here’s to a lengthy stay among the elite.

The post Scottish Mortgage plc deserves its place in the FTSE 100 appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, according to my sums, Capita and easyJet are also teetering on the brink. And, with the reshuffle being decided on market capitalisations at the close of business today, a poor performance by their shares in the remaining hours of trading, could see one or both follow Dixons through the trapdoor.

Consumer spending

I’ve written about my views on easyJet recently, while my Foolish colleague Jack Tang looked at Capita just last week. So, I’ll have a quick gander at racing-certainty-for-demotion Dixons, before revealing the FTSE 250 firms that are in line for promotion to the FTSE 100.

Dixons shares are down about 13% since the last index review, with the major part of the fall coming since the company’s Christmas trading update on 24 January. There wasn’t much wrong with the update as far as I could see. Management trumpeted a “fifth consecutive year of Christmas growth” and said it was trading in line with expectations for its financial year to 29 April but clearly the market was unimpressed.

Although Dixons reported a solid performance from large screen TVs, which it views as “a bellwether for consumer sentiment”, the market appears to be pricing-in the prospect of consumer belt-tightening (in which discretionary spending reduces disproportionately) as inflation rises and wage increases slow.

The company trades on just 9.5 times current-year forecast earnings, with a prospective dividend yield of 3.6% but earnings forecasts could come under pressure, with consumer spending power set to come under pressure. Add in a protracted period of Brexit-related uncertainty and I think the stock is best avoided for the time being.

New FTSE 100 entrants

Scottish Mortgage Investment Trust looks nailed-on to gain promotion to the FTSE 100, as it currently sits two places above the automatic entry level. This company invests globally and, with less than 4% of its portfolio in the UK and 47% in North America (including the likes of Amazon.com and Facebook), it has benefitted from the weakening of sterling since the EU Referendum.

Other promotions would depend on whether Capita and/or easyJet slip into the drop zone. If they do, Rentokil Initial, a global business, not just the ‘royal rat-catcher’ of old, and international packaging firm DS Smith are in the prime positions for promotion. Gold and silver miner Polymetal International, which lost its place in the FTSE 100 at the last review, could also be in the mix for a quick return to the top index.

It’s all very tight at this quarter’s review, with today’s trading being key to the outcome. Changes to the index will take effect from Monday 20 March.

The post Dixons Carphone plc set for FTSE 100 exit. Capita plc & easyJet plc also in danger appeared first on The Twelfth Magpie.

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• Up 3.5% this month, is it time for UK investors to cycle back into the more domestically-focused FTSE 250 index?

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended DS Smith. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.