It has been a busy time for shareholders in Scottish Mortgage Investment Trust (SMT), but it has been a fruitful time too with the shares hitting new 12-month highs in March.

First, the board announced it would buy back at least £1 billion worth of shares in order to help narrow the discount to NAV (net asset value).

Then, Delaware-based Elliott Advisors revealed it had taken a 5% stake in the trust through the purchase of shares and derivatives.

A quick look at trading in Scottish Mortgage over the last fortnight shows a big spike in volume on 15 March – the same day the board announced the share buyback plan – and again on 19 March.

Iain Scouller, head of investment trust research at Stifel, posits asking the trust’s board ‘Were you aware there was stake building underway when you announced the £1 billion buyback?’.

‘The market is likely to suspect the board was aware some significant trading activity was afoot, though perhaps not knowing which investor was behind it, and this was one factor in the timing of the buyback announcement.’

Scouller suggests the board may have hoped that by announcing a buyback the discount would narrow enough to dissuade would-be activists from buying shares in the near term.

Given Elliott has previous form in campaigning for change at trusts – and has had notable success to boot – the board may now be hoping the firm trades out of the shares for a quick gain if the discount narrows further.

However, given the shares have already bolted on these two bits of news, £1 billion is now only enough to buy around 8% of the trust over two years, or 4% each year, which looks less impressive than at first glance compared with Elliott’s stake.

As AJ Bell investment analyst Dan Coatsworth highlights, Scottish Mortgage shares historically traded at a premium to NAV so Elliott may be looking for a free ride as the discount narrows although that doesn’t get to the root of the problem.

‘Part of Scottish Mortgage’s share price weakness was down to rising interest rates which negatively affected valuations of companies where the story is about future cash flow. As the share price fell, there were also suggestions that Scottish Mortgage had been taking too many wild bets on blue-sky companies that were miles off making any money,’ says Coatsworth.

Having fewer unquoted stocks would mean a more liquid portfolio but would also deprive the trust of future IPO candidates, he adds. 

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Ian Conway) and the editor (Tom Sieber) own shares in AJ Bell.

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