Scottish Mortgage already spent two-thirds of buyback money

Global growth investment trust Scottish Mortgage (LSE:SMT) has bought back £690 million worth of shares since it announced its blockbuster buyback programme in March this year in an attempt to reduce its discount.

This is 69% of the £1 billion it said it had at least made available for buybacks over the next two years. In the two years before the announcement, the board spent £353 million on buybacks to boost its lagging share price.

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The latest figures were revealed at the annual general meeting of Scottish Mortgage last week. Chair of the trust Justin Dowley said: “We are buying back about £40 million of stock a week. Our balance sheet is strong enough to be able to do that.”

Dowley revealed that Scottish Mortgage has bought back half the stake that activist investor Elliott Management acquired.

“The size of their stake was a little uncomfortable. We have had very constructive conversations with Elliott. They know our team and portfolio very well. I take my hat off to them - they have bought a lot of stock at    -18% discount and sold at -6% discount.” 

Dowley added that the board has an obligation to provide liquidity at as close to the net asset value of the portfolio as possible.

The discount on Scottish Mortgage is currently -9%. The average discount of the trust over the past 12 months has been -13%, while it was greater than -20% two years ago.

There have been two core reasons for the wide discount. First is a general sell-off of investment trust shares, with most sectors seeing their discounts widen in 2022 as interest rates rises and higher inflation spooked markets. The Association of Investment Companies calculated that discounts at the end of 2023 were the widest since 2008, at -16.9% on average.

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Second is a market view that Scottish Mortgage’s 27% invested in private assets may be overvalued.

Scottish Mortgage has to estimate – with the help of consultants – the value of its unlisted holdings. Because they are not “marked to market” daily, like listed shares are, there is an element of uncertainty about how much companies like SpaceX or Northvolt are really worth. By knocking Scottish Mortgage’s shares down to a discount, investors could be arguing that its unlisted assets are overvalued.

The managers of the trust, Tom Slater and Lawrence Burns, are continuing their investment approach – with the backing of the board – of finding companies that have the potential to transform their industries.

Artificial intelligence (AI) is a top priority for the manager. At the AGM, Burns said AI applications were potentially vast and investors could profit via hardware, infrastructure and applications.

The trust has large stakes in Nvidia (NASDAQ:NVDA), Amazon (NASDAQ:AMZN) and ASML (EURONEXT:ASML), which are all tipped to be AI winners.

Nevertheless, Burns said they had made reductions to their Nvidia stake this year as the business is likely to be cyclical.