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Scottish Mortgage shares could be rewarding. How’s the risk?

Risk reward ratio / risk management concept

As a long-term investor, my focus is on how shares perform over the long term. In that regard, I think Scottish Mortgage Investment Trust (LSE: SMT) has a lot going for it. Scottish Mortgage shares are down 37% over the past year.

But they are 56% higher over five years, over 450% across five years, and 760% since the millennium. The trust’s track record stretches back much further: it last cut its annual dividend 90 years ago.

The past is not necessarily a guide to what happens next. While Scottish Mortgage shares have been richly rewarding in the past, that may not be the case in future. On top of that, as an investor I need to consider the potential risks attached before I invest in shares.

So, how does Scottish Mortgage stack up in my analysis?

Proven approach

The past is not a guide to the future — but it can still give us some clues about what might happen next!

As an investment trust, Scottish Mortgage employs fund managers to allocate its money across different companies. That offers me a number of potential benefits as an investor. Not only can I expose myself to a diversified portfolio by buying shares in the investment trust, but its managers are actively scouring stock markets worldwide for the next big thing. They may spot great ideas I would miss myself.

They are also looking beyond stock markets. For example, the trust owns a stake in unlisted SpaceX — something I would struggle to buy even if I wanted to.

Lately, that approach has not worked so well, as shown by the sharp decline in the value of Scottish Mortgage shares. A fund manager reportedly referred to 2022 as a “humbling year” as holdings like Tesla and Shopify plummeted in value.

Risk management

But I see that as the flipside of the trust’s strong performance over the past few years.

Such success came from investing in promising growth stories early in their development. That worked well for some years. But as tech shares have crashed, so too has Scottish Mortgage due to its heavy exposure to the sector.

Owning shares in an investment trust can offer me diversification. Its funds may be spread across dozens of companies, as is the case for Scottish Mortgage.

But diversifying in itself is no guarantee of positive returns. Indeed, the fall in Scottish Mortgage shares reflects the fact that it has diversified across individual companies, but remains heavily exposed to a few business sectors, such as tech and healthcare. That continues to be the case even after fund managers have reshuffled the portfolio over the past few months.

My move

Clearly I see some risks here. Tech valuations could fall further, with a knock-on effect for Scottish Mortgage shares.

Despite that, as a long-term investor I am attracted by the long-term risk-to-reward proposition of buying the trust’s shares. If I had spare funds to invest today, that is exactly what I would do.

The post Scottish Mortgage shares could be rewarding. How’s the risk? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Shopify 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.