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Buying undervalued growth stocks can yield strong long-term returns. With decades left in my investing journey, I'm happy to be exposed to dynamic investments in my portfolio to try to beat the market.
With signs that macroeconomic conditions may be improving, I am optimistic FTSE 100 The growth of the stock I own may be preparing for a rally in the stock price.
Scottish Mortgage Investment Trust (LSE:SMT) is the stock I'm talking about. That's why I'm negative about fund growth today.
The discount may not last long
Baillie GiffordThe £13.7bn managed fund invests in a portfolio with a strong belief in growth stocks around the world.
It is a one-stop shop for diversification among major stock market names. These include the semiconductor giants Nvidia again ASML and e-commerce titans like Amazon and its Latin American rival MercadoLibre. It also invests in unlisted stocks such as Elon Musk's venture SpaceX.
Assessing the net asset value (NAV) of a closed-end fund investment is one way to calculate how cheap its share price is. It is not the same as valuing a traditional company by its book value.
Currently, Scottish Mortgage's share price (just over £8 today) stands at a 10% discount to its NAV. For most of the last decade, it has been sold for a small fee.
However, the post-pandemic gap between the value of the shares and the underlying value of the trust's investments has narrowed since mid-2023. It looks like timing may be of the essence for investors looking to buy cheap Scottish Mortgage shares.
Share the price increase
Interest rate cuts are high on the agenda of central banks around the world. Conventional investment wisdom suggests that this would boost the performance of stocks such as those in Scottish Mortgage's portfolio.
That's because the attractiveness of fixed-income investments like bonds is falling, prompting investors to seek higher-risk growth opportunities.
Furthermore, the management team has shown a willingness to revive the share price back to its pandemic glory days when it briefly changed hands above £15.
The two-year plan to buy back shares worth at least £1bn is the largest ever undertaken by a UK investment trust. I view this as a shareholder-friendly move and an important step in addressing the current discount.
Volatility worries potential investors. Scottish Mortgage is not a 'stable as it goes' fund. The potential for major stock price declines is an inherent risk of chasing high growth.
I also have concerns about the fund's private equity exposure. This was the cause of the boardroom outbreak that made headlines last year. Ultimately, it led to the departure of Professor Amar Bhidé who slammed the door on his way out of his public comment.
Unlisted stocks are hard to call. It is worrying when those close to the action express doubts about the trust's plan.
I am an optimistic shareholder
Risk aside, I believe Scottish Mortgage's share price is set to rise due to the changing economic climate and NAV discount.
I'm not a fan of every stock in the portfolio, but I like most of the fund's investments. That's good for me. I will continue to hold my shares for a long time.
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