Ask ii: what is an activist investor and how will Scottish Mortgage be impacted?

A reader asks:“I’ve seen that an American investor, Elliott Management, has taken a 5% position in Scottish Mortgage. The media describes the investment firm as an ‘activist investor’, but what does this actually mean and what might the consequence be for Scottish Mortgage?” 

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Sam Benstead, deputy collectives editor at interactive investor (pictured above), says: “It’s a great question, and something that UK-based investors are definitely less familiar with than American ones. An activist investor refers to an investment firm or individual that seeks to use their power as a shareholder to influence how a company, or in this case an investment trust, operates. Because investment trusts are listed businesses, large investors are able to build up substantial position sizes, which then gives them influence over how a company or trust is run.  

“They may do this because they see an unrealised opportunity that, with pressure on management, can lead to a turnaround and help them bank a profit. Tactics to return a distressed asset to form could be a change in management or investment strategy, restructuring a company’s finances, or selling parts of a business.  

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In addition, activist investors can put pressure on management teams to change approach or lobby on certain issues, such as climate change.  

“Unlike private equity investors, most activists are not trying to acquire majority stakes in a business, but rather use their influence, often in public forums, to kickstart a turnaround. Famous activist investors include Carl Icahn in America, who purchased 1% of Apple Inc (NASDAQ:AAPL) in 2013 and urged the firm to buy back its own shares.  

“Elliott Management is another well-known activist and has a track record of shaking up UK investment trusts. It built up a near-20% position in Alliance Trust Ord (LSE:ATST) and forced a switch to today’s multi-manager approach in 2017, which has worked out well for shareholders.  

“It is unclear what it wants from Scottish Mortgage Ord (LSE:SMT), but the discount has already narrowed substantially, from -15% to -5% over the past month, helped by a pledge to buy back £1 billion of shares over the next two years. The buyback announcement may have been the result of pressure from Elliott Management. The activist investor may also pressure Scottish Mortgage to sell part of its private company portfolio to restore investor faith in its valuation, which is an estimate rather than a market figure. 

“The manager of the trust, Tom Slater, said that the trust had had a ‘constructive conversation’ with Elliott Management and said that their situation was not similar to when Elliott took a stake in Alliance Trust.”