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The board of Scottish Mortgage Investment Trust has announced a £1bn share buyback in an attempt to prop up its share price, which is at a 13 per cent discount to its net asset value.
The buyback, which represents 9 per cent of the trust’s shares, is the largest-ever for an investment trust, according to analysts at Jefferies. Baillie Gifford’s flagship £14bn trust, which invests in high-growth companies such as Nvidia and Tesla, has already bought back £353mn of shares in the past two years.
Tom Slater, the trust’s manager, said: “In a volatile period for growth investment, we own a portfolio of established companies achieving rapid expansion . . . The stock market has yet to fully recognise their progress, which creates the opportunity for us to buy the portfolio for less than its market value.”
Scottish Mortgage’s value surged during a pandemic-era tech stock rally, with shares rising 76 per cent between March and September 2020. Since then, it has suffered from a sell-off in growth companies prompted by aggressive interest rate rises from central banks to fight inflation.
The trust has underperformed its benchmark on a three-year basis, with its shares losing 28.5 per cent compared with a 36.5 per cent gain for the FTSE All-World index. In May last year it defended its strategy and urged shareholders to remain “disciplined and patient”.
The move comes as high interest rates and complex regulations continue to weigh on the investment trust sector. The trust’s board said its balance sheet had been strengthened by free cash flow from the portfolio companies having more than doubled over the past year.
The trust remains ahead of its benchmark over a 10-year basis, however, returning 291.8 per cent compared with the FTSE index’s 211.6 per cent.
It has also faced criticism over its allocations to private companies, which began in 2012 and contributed to a boardroom bust-up last year. On Friday the board said if the buyback was completed in full, it would increase the portfolio’s exposure to unlisted companies to 28.3 per cent, from its current 26.2 per cent, just under its own 30 per cent limit.
The update comes amid wider disruption for the investment trust sector, which is undergoing consolidation as rising interest rates and complex regulations have pushed investors out of the vehicles and weighed on their share prices.
The average investment trust share price discount to net asset value hit 16.9 per cent in October last year, just below the 17.7 per cent recorded at the end of 2008, according to data from the Association of Investment Companies. The discounts have led to fund managers, wealth managers and peers to call for a change in the way investment trust fees are reported to investors.
