At £12.3bn, the UK’s largest investment company Scottish Mortgage Investment Trust may have been on a rollercoaster over the past few years, with the economic downturn and rally in technology stocks.
But following a period of underperformance, the fund has recently drawn the attention of US hedge fund Elliott Advisors, which, it has emerged, took a 5 per cent stake, becoming its largest shareholder.
This happened around the same time as Scottish Mortgage launched a £1bn share buyback, amounting to 9 per cent of the entire fund, although it has become apparent Elliott has been building that stake since 2023.
Elliott, with £65bn of assets under management, has a reputation for being an “activist investor” and many are wondering what this brings for one of the most venerable of investment companies, around since 1909 and managed by Baillie Gifford.
When long-serving fund manager James Anderson retired from Baillie Gifford in March 2021, he was bringing the curtain down on a tenure as manager of the Scottish Mortgage Investment Trust, which saw the vehicle become the largest in the UK and a FTSE 100 company.
Anderson was leaving Baillie Gifford because at 60 he had reached the mandatory retirement age at the company. But hindsight would make the timing look extremely prescient, as the rally in tech stocks – which had been a feature of the market since the onset of the pandemic – came to a shuddering halt around November 2021, just as he was being measured for a new set of metaphorical golf clubs.
Tech stocks rally
In the three years to March 26, which coincides almost exactly to three years since Anderson retired and covers both the tail-end of the tech stock bull market, its down year of 2022 and the more recent artificial intelligence rally in tech stocks, Scottish Mortgage has lost 20 per cent, while the average trust in the Investment Association Global sector has gained 9 per cent.
The tech rally of the past year has been kinder to Scottish Mortgage, however – its 35 per cent return is markedly ahead the sector average return of 22 per cent.
As an activist investor, Elliott Advisors seeks to improve how companies are managed to drive improved shareholder returns. Its interests range from ownership of AC Milan football club to a recent bid for UK electrical goods retailer Currys.
Scottish Mortgage produced brilliant returns when interest rates were near zero, but we have to see whether they can do the job when rates are above thatIndustry analystA person familiar with the situation says Elliott has form for buying into and changing the focus of investment trusts — in 2017, it brought to an end a seven-year activist campaign to change the investment style of the Alliance Trust, with the latter switching from being directly invested to becoming a multi-manager fund, with Elliott then being bought out of its investment by Alliance Trust.
One analyst, who requested to be quoted anonymously in order to protect business relationships, says their long-term scepticism around the investment case for Scottish Mortgage has not been altered by recent events.
The analyst is concerned about the “state of the balance sheet”, with unquoted assets abounding, and the valuations those assets may have if they were sold relative to the valuation those assets have in the accounts of the trust.
The analyst says: “The other thing I would question is the fundamental investment thesis. Scottish Mortgage produced brilliant returns when interest rates were near zero, but we have to see whether they can do the job when rates are above that.”
Unwritten rules?
At present, the trust has 26 per cent of its capital deployed in unquoted assets,
The level of unwuoted assets is a concern for Ben Yearsley, who notes that the £1bn buy back will be funded partly by selling some of the quoted assets, and therefore increasing the level of the unquoted.
The analyst also does not believe the buyback will make much difference to shareholders. They say that while £1bn is a “big number – it’s a very big trust, and buying back 9 per cent of the shares is really just in line with what others are doing”.
“A cynic might remark that the buyback is being done for Elliott,” they add.
Elliott Advisors partner Nabeel Bhanji tells FT Adviser: “We are grateful for the dialogue we have had with the board and management of Scottish Mortgage in recent months. We strongly support the company’s recently announced £1bn buyback – the largest buyback programme ever announced by a UK closed-end fund – and look forward to continuing our engagement.”
We have a long-standing commitment to keep the discount between the share price and the net asset value low. [But] over the past two years we have had other calls on our available capitalTom Slater, Baillie GiffordTom Slater, Anderson’s replacement at Baillie Gifford, says the plan to buy back shares is part of the long-standing commitment to that policy. Speaking on a webinar for clients, he said: “We have a long-standing commitment to keep the discount between the share price and the net asset value low. [But] over the past two years we have had other calls on our available capital.
“We have paid back about £400mn of debt as we wanted to maintain a strong balance sheet at a time when the value of our listed holdings was falling. We also used some of the capital we have to make follow-on investments in some of the unquoted stocks. But then we felt that the balance sheet was strong enough,” he continued.
“It’s the board’s decision to do a buyback and their responsibility is to all shareholders. We engaged with Elliott and with all other significant shareholders.”
What’s it worth?
Mick Gilligan, head of the model portfolio service at wealth management firm Killik & Co, notes that the discount at which Scottish Mortgage shares trade has fallen to 7 per cent, having been at 15 per cent prior to the announcement of the buyback.
He says that represents a gain for all shareholders and he has not been buying the shares for his clients since early 2023, but is comfortable with legacy positions owned by his clients in the trust.
Analysts at Numis are more positive on the prospects for Scottish Mortgage. In a note to clients, shared with FT Adviser, they noted that Elliott’s investment was worth £607mn on the day they declared it.
They said: “Elliott has a long, albeit sporadic, relationship with investment companies, having been active in the 1990s, but stepping back as discounts narrowed following the widespread introduction of buybacks. We believe Elliott’s interest in the sector has also been limited by outgrowing the investment companies sector, with few ICs having the size or trading liquidity for it to take a position.”
They regard the trust’s attitude to buybacks in recent years as being “prudent”, but also view the decision to buy back shares as being a desire to “keep the wolf from the door”, that is, discourage further investment by activists that may want to change how the trust is run.
The analysts also believe it reflects a greater level of confidence in how the unquoted assets are performing, and so free up the cash to do buybacks.
The fate of Scottish Mortgage, one of the principal funds through which investors can access unquoted technology shares in the UK, is likely to resonate with advisers in the months to come.
David Thorpe is investment editor at FT Adviser
