What caught my eye this week.
The UK’s largest investment trust Scottish Mortgage announced a £1bn share buyback plan on Friday. (Disclosure: I own some).
Appropriately enough, it’s the biggest buyback ever undertaken by a trust. Meaningful even set against Scottish Mortgage’s £11bn-plus market cap.
Traders seem to think size matters. Scottish Mortgage shares ended the day up 6%.
That’s a punchy move considering that in theory a share buyback – even a £1bn one – is just a capital rejig decision from the ‘look-through’ perspective of a shareholder.
Simplifying, cash that was on the trust’s balance sheet – money each shareholder has a notional claim on – is simply converted via a buyback programme into shares repurchased by the trust that, at least initially, are also held on its balance sheet, though they are often cancelled thereafter.
In practice, however, stuff changes.
In the case of Scottish Mortgage, it is buying into its own portfolio at a wide discount – 15% to Net Asset Value (NAV) when the news broke – which is by itself accretive to its NAV.
Moreover the managers presumably have maximum faith in their own portfolio, versus any new investment the trust could have made with the money instead. So in that sense a buyback is a de-risking move.
On the other hand, a trust may increase borrowings to do a share repurchase. That increases risk.
Share buybacks do reduce the number of shares in issue. As the trust shrinks, the expenses of running it are spread across fewer shares in total. This slightly increases the costs for ongoing shareholders.
Finally, liquidity can improve for shares in companies executing a sizeable buyback. That’s because there’s a new big buyer in the market – itself!
Improved liquidity can make shares more attractive to trade, and this might narrow the discount a bit too.
Trust us, we’re professionals
The main impact of a big buyback though is surely psychological.
Alongside declaring the availability of £1bn to buy back its own shares, Scottish Mortgage said its:
[…] public and private portfolio is delivering strong operational results, evidenced in part by free cashflow from the portfolio companies having more than doubled over the past year.
Investors have fretted since the crash of 2022 about the valuations of private companies. There was a big correction in the valuation for listed growth firms, but there’s obviously no marked-to-market price for unlisted ones. You have to believe a fund manager’s valuations.
Scottish Mortgage has claimed its holdings are doing fine before. I guess the words have more weight with £1bn behind them.
To some extent then, yesterday’s 6% share price jump represents investors leaping out of their chairs and declaring themselves believers.
However it’s worth noting that the trust already bought back £353m of shares over the past two years. The increased buyback scope is huge. But it’s not a wholly novel development.
Indeed I suspect the timing of this announcement was triggered by Scottish Mortgage’s portfolio reaching a level where it could buyback £1bn of shares without breaching its limits on the proportion of private companies in that portfolio – given some of the £1bn warchest will presumably come from selling its listed equities, which will increase the percentage in unlisted ones.
Win or lose
All told it’ll be interesting to see if this little rally holds.
In Monevator Moguls, we’ve been running the Geiger counter over discounted investment trusts for a while. To me it appears to be one of the clear opportunities for active investors right now.
Everyone has a favoured theory as to why discounts have widened so much in the past 18-24 months.
I always tend to favour sentiment. Other factors fingered include the ongoing merger of smaller wealth managers that leaves less appetite for interesting stock picking, unfair cost disclosure regulation, and capital flowing out of the London market at a record pace.
Investors focusing on any individual trust – or sector – have their own pet peeves too. The unlisted holdings I mentioned for growth trusts, say, or a lack of transactions in the commercial property market driving REIT discounts or, again, the shunning of UK equities that may be behind the discounts on once-revered UK equity income trusts.
Again, I suspect it’s nothing that a prolonged bull market wouldn’t solve. But I have no crystal ball.
Naughty active investors who enjoy the thrill of the hunt – despite knowing better – are welcome to join us on Moguls. I’m sure we’ll look at more cheap-seeming trusts in the months ahead.
Finally it has to be said that investment trusts are largely a UK market peculiarity.
Perhaps – sadly – the writing is on the wall for them?
A cool £1bn from Scottish Mortgage says not, but will this news mark a reversal in the decline of the sector or perhaps a last futile throw of the dice? Time will tell.
Have a great weekend!
From Monevator
What to do if you’re queasy about the US stock market – Monevator [Members]
Trend following: Is the trend your friend? – Monevator
From the archive-ator: How to work out which platform is cheapest for you – Monevator
News
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Why firms are bringing manufacturing back home – BBC
UK economy returns to growth – Yahoo Finance
Brexit: no British beef exported to Australia under UK’s first post-EU trade deal due to [checks notes] red tape – National World
Infrastructure chief hits out at push for UK pension funds to invest more in Britain [Search result] – FT
Reddit gets ready for IPO, setting top valuation at $6.4bn – Axios
Virgin and Tesco Bank deals end-of-the-road for ‘gen one’ challenger banks – This Is Money
Libor trader Hayes’ conviction should be quashed, lawyer tells UK court – Reuters
London-based Apple rival Nothing sells 100,000 new phones in hours – Forbes
Be a bond manager if you want to beat your benchmark – Morningstar
Products and services
FCA is open to ending to free banking in Britain – Reuters
Important changes to improve equity release – Which
Open an ISA account with low-cost platform InvestEngine and get up to £2,500 as a cash bonus (Affiliate link, T&Cs apply. Capital at risk) – InvestEngine
How to survive mortgage market turmoil as rates rise and deals are pulled – Guardian
Smart ways to make the most of the new ISA rules – Which
Ground rent not legally or commercially necessary, says UK watchdog – Guardian
What can you do about rising broadband prices? – Be Clever With Your Cash
How does HSBC’s new £220 cashback offer compare to rivals? – Which
Homes for sale in England with great gardens, in pictures – Guardian
Comment and opinion
Passive funds leave actives languishing [Search result] – FT
Put your NI saving into your pension for big rewards at retirement – This Is Money
Acceptable types of lifestyle creep – Mr Stingy
Risks retirees face – Humble Dollar
Does BlackRock love me? – Fortunes & Frictions
The Internet, AI, and the madness of crowds [Podcast] – A Long Time In Finance
Capital gains, and the U.S. versus the rest – Simple Living in Somerset
Naughty corner: Active antics
The Magnificent Seven: fortune or folly? – Morningstar
AIC updates its ‘dividend hero’ investment trusts for 2024 – AIC
Edge isn’t enough, you also need patience – Behavioural Investment
Masterclass on US housebuilder D.R. Horton [Podcast] – Business Breakdowns
Signs of a good investment process – Flyover Stocks
Why quality stocks do so well – Klement on Investing
Gold’s record-setting pace is exuberantly rational – Bloomberg via WM
Out of office mini-special
ONS civil servants threaten to strike over two days a week in the office – GB News via MSN
What a $1 deal tells us about American’s office market – BBC
The ‘standoff’ over what office buildings are worth – Axios
Crypt o’ crypto
London Stock Exchange changes tack, will accept crypto-focused exchange traded products… – The Block
…but FCA says they’ll be restricted to professional investors – FCA
What’s behind the Bitcoin price surge? Vibes, mostly – Wired
More people buy, number go up – Of Dollars and Data
Kindle book bargains
The Success Myth by Emma Gannon – £0.99 on Kindle
Eat Shop Save by Dale Pinnock – £0.99 on Kindle
Lean In by Sheryl Sandberg – £0.99 on Kindle
The Making of a Billionaire by John Caudwell – £0.99 on Kindle
Environmental factors
Giant redwoods ‘thriving in the UK’ – BBC
Next-gen battery tech: Reimagining every aspect of batteries – ArsTechnica
Eight ways to overhaul the UK’s inadequate sewer system – The Conversation
The rewilding project bringing ancient cows back to Portugal – BBC
Welsh valleys rank surprisingly highly for UK biodiversity – Nation Cymru
Internet is dying mini-special
AI-generated spam is killing the Internet, aided by big tech – Ed Zitron
Mr Beast is killing YouTube, aided by YouTube’s algorithm – Polygon
Off our beat
The dirty secret about how our hands spread disease – The Smithsonian
Financial nihilism – Epsilon Theory
End phone-based childhoods now – The Atlantic [h/t Abnormal Returns]
The 20-5-3 rule for spending time outdoors – Art of Manliness
How to rewrite the narrative on aging [Podcast/transcript] – The Good Life Project
Choose your chimps carefully – A Teachable Moment
The world’s coolest streets in 2024 – Time Out
And finally…
“To limit how much we have to think, for many decisions like what to buy, we often rely on habits – that is, we simply repeat what we did last time when faced with a similar situation.”
– Richard Shotton, The Illusion of Choice
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Be interesting to see a range of views here on the SM buy back I thought it was pretty positive and a good chance for investors to access the discount…albeit I guess nothing was stopping them from doing that themselves. As ever, I guess only time will tell and in particular what the value of the illiquid assets eventually turn out to be. You pays your money and takes your chance as ever.
>Finally it has to be said that investment trusts are largely a UK market peculiarity.
I recently read J.K. Galbraith’s book ‘The Great Crash 1929’ and was intrigued to learn that one of the phenomena leading up to the crash was the prevalence of US investment trusts at that time. They were, however, very different beasts from the venerable UK ITs. The US versions were primarily a means of making leveraged investments – and of course it all ended in tears.
“ONS civil servants threaten to strike over two days a week in the office”
The ONS has been terribly obliging to the Powers That Be in choosing what figures on Covid to publish and how they are analysed. Perhaps they think it’s time for payback.
One could always take the Cowperthwaite line and just abolish the buggers.
art of manliness. Seems a bit ‘right wing’ for this blog. Excellent !
I hold for income a “bijou” fully ISA’d IT portfolio (tickers AEI, CTY, HHI, and MYI) which currently yields a tax-free 6%.
Putting the Scottish Mortgage situation into perspective, I can do no better than to quote verbatim from an item in The Investment Trusts Handbook 2024 viz:
“Which methods of discount control are proving to be most effective?
There is no one-size-fits-all discount control. The best approach varies by company, depending on the nature of their portfolios, cash flows, balance sheet and shareholder register. Ultimately, a discount/premium is about ensuring that an investment company is attractive to a wide range of buyers and will depend on factors including performance, mandate, marketing, fees, transparency and corporate governance.
That said, we believe that share buybacks [sic] can be a flexible and easy to implement way for boards to signal that they are focused on shareholders’ interests and capital allocation, as it can be difficult to justify a new investment versus buying your own portfolio on a wide discount.”
The end of ITs is nigh? I think not.
@algernond — I’ve been living to them for years. The name is a bit anachronistic but the site is just a centrist lifestyle blog for men. 🙂
Of Dollars and Data & Epsilon Theory hits bullseye. From latter “Back in the early 60’s you could get 94 shares of the SPX with the median household income. That peaked in the crash of 1982 at 219 shares and then structurally collapsed”. Now it’s 18 shares. Hard to believe, but true.
@DavidV This could explain why Interactive Brokers recently reclassified all UK ITs as being so dodgy that you have to be an experienced hedge fund manager to even think about investing in them. (I exaggerate slightly.)
@Always Late – that’s amazing. RCP seems to be still tradeable normally, other ordinary ITs such as SMT, CGT, TRY are indeed restricted. IB are really determined to make their ISA useless. (They already block all bonds and all mutual funds.)
Interesting news on SMT – after dragging my feet for a couple of years, I’ve finally been offloading my own holding bit by bit over the last few months, as wasn’t convinced I would ever recover my losses. Some of the resulting funds have gone into the ‘safety’ of a global tracker; the rest has been punted on Rolls Royce, though I do wish I offloaded sooner to get on RR when they were cheap as chips.
Will I regret my decision to get rid of SMT – only time will tell I guess.
Wasn’t Scottish Mortgage a star performer a few years ago, and then the long time manager retired ? At which point it all went wrong, and the share price plummeted. How does a share buyback fundamentally change anything ?
Nice set of links again this weekend. Particularly liked ALTIF podcast and Zitron post.
@Weenie (#10):
Best of luck with Royce’s. They have been on a real rollercoaster ride since the pandemic halted (almost overnight) a huge fraction of their income stream!
@trufflehunt #11
Scottish Mortgage is managed by Baillie Gifford, the Edinburgh-based investment management partnership. Listed on the LSE it is a constituent of the FTSE 100.
See this Guardian article re the retirement of James Anderson in 2022, saying inter alia that “Shares in SMT dropped about 2%” on this news. https://www.theguardian.com/business/2021/mar/19/star-stock-picker-james-anderson-retires-baillie-gifford
@all — We were hit in the past hour with a tsunami of spam and I’ve had to delete everything (nearly 1,000 spam comments, half of which are several hundred words long) without checking for misplaced real comments.
Apologies if something you posted went missing in this furore – good comments are always appreciated on Monevator – please blame the scamming scumbags not me 🙁
@Factor
Yes I know what Scottish Mortgage is. As it happens, among daily news reads, the Guardian is my regular goto, even of it is, like all the rest…, tomorrow’s fish and chip wrapper, as they used to say. It isn’t, though, a prime reference point for business/stock market stuff.
The SMT share price was heading rapidly South prior to Anderson’s retirement, and continued to crater after that. I seem to recall that SMT was quite proud of it’s links to what it considered the best brains in tech at universities/academics, and considered that these were a significant part of the trust’s long period of success.
For me, the optics of a big share buyback when your shares are at a low point are not great, except for shareholders wanting to get out.
‘Course, I may have misunderstood it all.
This is exactly the right time to do a big share buyback.
To be honest it’s bolstered my faith that SMT’s managers / board are committed to shareholder returns as much as growing AUM and investing in whizzy new things. 😉