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Buying undervalued growth stocks can yield solid gains over the long term. Since I have decades left in my investing career, I'm happy to have exposure to more volatile investments in my portfolio to try to outperform the market.
With signs that macroeconomic conditions could improve, I am hopeful that one FTSE 100 Index The growth stocks I own could be gearing up for a price rally.
Scottish Mortgage Investment Fund (LSE:SMT) is the stock I am talking about. Here is why I am optimistic about the fund's growth prospects today.
A discount that might not last
Baillie GiffordThe £13.7bn managed fund invests in a high-conviction portfolio of growth stocks around the world.
It is a one-stop shop for diversification across the top names in the stock market, including semiconductor giants. Nvidia and ASML and e-commerce titans like amazon and its Latin American rival MercadoLibreIt also invests in unlisted stocks, such as Elon Musk's company SpaceX.
Evaluating the net asset value (NAV) of a closed-end fund's investments is a way of estimating how cheap its stock price is. It's not unlike measuring a traditional company by its book value.
Scottish Mortgage's share price (just over £8 today) is currently at a steep 10% discount to its net asset value. For most of the past decade, it has traded at a slight premium.
However, the post-pandemic gap between the share price and the underlying value of the trust's investments has narrowed since mid-2023. It seems time could be of the essence for investors looking to buy cheap Scottish Mortgage shares.
Share price growth
Interest rate cuts are high on the agenda of major central banks around the world. Conventional investment wisdom suggests this could boost the performance of growth stocks such as those in Scottish Mortgage’s portfolio.
This is because the attractiveness of fixed-income investments such as bonds is decreasing, encouraging investors to seek higher-risk growth opportunities.
The management team has also shown its determination to revive the share price and return it to its glory days during the pandemic, when it briefly traded above £15.
A two-year share buyback programme worth at least £1 billion is the largest ever undertaken by a UK investment fund. I consider this a shareholder-friendly move and an important step towards addressing the current discount.
Volatility is a concern for potential investors. Scottish Mortgage is not an investment that will remain stable as the market moves forward. The possibility of large falls in the share price is an intrinsic risk of seeking further growth.
I am also concerned about the fund’s exposure to private equity. This was a factor in a boardroom dispute that made headlines last year. It ultimately led to the departure of Professor Amar Bhidé, who slammed the door on his public comments.
Unlisted shares are difficult to value. It is worrying that those closest to the stock are expressing doubts about the trust's strategy.
I am an optimistic shareholder
Despite the risks, I believe Scottish Mortgage's share price is poised for growth given the changing economic climate and discounted net asset value.
I'm not a fan of every stock in the portfolio, but I like most of the investments in the fund. That's good enough for me. I'll continue to hold my stocks for the long term.