Scottish Mortgage trust spends millions buying back shares

Scottish Mortgage trust spends millions buying back shares
Scottish Mortgage trust manager Tom Slater

The board of the £8.3bn Scottish Mortgage investment trust has responded to the mandate’s widening discount by buying back millions of pounds worth of shares. 

Scottish Mortgage is the largest investment trust in the UK market and is run by Baillie Gifford. 

The trust has gone from a 4 per cent premium to its net assets to a 2.1 per cent discount in the past six months, according to data from the Association of Investment Companies. 

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The share price has fallen from £5.43 to £5.06 since August. 

A series of stock market filings by the trust, examined by FTAdviser, showed that the trust engaged in a number of transactions throughout October to buy back shares, totalling just over £5.4m. 

Buying back shares has the effect of reducing the number of shares in existence, and thus should boost the share price.

But the smaller the size of the trust the less revenue is generated for its manager, Baillie Gifford. 

The millions spent on buying back shares in October contrasted with prior months, as no shares were bought back in any other month in 2019, while new shares were issued every month from January to June. 

The Scottish Mortgage investment trust lost 10 per cent in the three months to October 31, but has returned 116 per cent over the past five years, compared with 81 per cent for the average trust in the AIC Global sector in the same time period. 

Tom Slater, joint manager of the trust, told FTAdviser: "The long standing policy is to keep the net asset value and the share price as close to in line with each other as we can.

"Typically, this means quite a bit of activity either buying back shares or issuing new shares.

"We don't declare a set number for the premium or discount that we would be happy with, as that creates potential arbitrage opportunities. Last year was actually very unusual, in that we didn't buy back any shares at all, only issued new ones.

"But what we are doing now is buying shares back at a discount, this boosts the share price and so is value accretive for the current shareholders." 

The underperformance of the trust corresponded with the shift in market sentiment in recent months, as investors have moved away from the growth style of investing deployed by Scottish Mortgage.

In recent months there has been an uptick in bond yields, affecting many growth managers, including Nick Train and Terry Smith, as well as Scottish Mortgage.  

The trust’s largest holdings are technology stocks such as Amazon and Tesla. Those stocks benefit from low bond yields because they don’t pay significant dividends themselves so in this environment look relatively more attractive. 

In addition, many of the technology and healthcare stocks invested in by Scottish Mortgage do not make a profit and require debt to function, and low interest rates keep the cost of the debt low.