What caught my eye this week.
The UK’s largest investment trust Scottish Mortgage announced [1] 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 [2] – 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 [3] 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 [4]. Other factors fingered include the ongoing merger of smaller wealth managers that leaves less appetite for interesting stock picking, unfair cost disclosure [5] regulation, and capital flowing out of the London market at a record pace [6].
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 [7]. 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 [8] [Members [7]]
Trend following: Is the trend your friend? – Monevator [9]
From the archive-ator: How to work out which platform is cheapest for you – Monevator [10]
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Why firms are bringing manufacturing back home – BBC [11]
UK economy returns to growth – Yahoo Finance [12]
Brexit: no British beef exported to Australia under UK’s first post-EU trade deal due to [checks notes] red tape – National World [13]
Infrastructure chief hits out at push for UK pension funds to invest more in Britain [Search result] – FT [14]
Reddit gets ready for IPO, setting top valuation at $6.4bn – Axios [15]
Virgin and Tesco Bank deals end-of-the-road for ‘gen one’ challenger banks – This Is Money [16]
Libor trader Hayes’ conviction should be quashed, lawyer tells UK court – Reuters [17]
London-based Apple rival Nothing sells 100,000 new phones in hours – Forbes [18]
[19]
Be a bond manager if you want to beat your benchmark – Morningstar [20]
Products and services
FCA is open to ending to free banking in Britain – Reuters [21]
Important changes to improve equity release – Which [22]
Open an ISA account with low-cost platform InvestEngine [23] and get up to £2,500 as a cash bonus (Affiliate link, T&Cs apply. Capital at risk) – InvestEngine [23]
How to survive mortgage market turmoil as rates rise and deals are pulled – Guardian [24]
Smart ways to make the most of the new ISA rules – Which [25]
Ground rent not legally or commercially necessary, says UK watchdog – Guardian [26]
What can you do about rising broadband prices? – Be Clever With Your Cash [27]
How does HSBC’s new £220 cashback offer compare to rivals? – Which [28]
Homes for sale in England with great gardens, in pictures – Guardian [29]
Comment and opinion
Passive funds leave actives languishing [Search result] – FT [30]
Put your NI saving into your pension for big rewards at retirement – This Is Money [31]
Acceptable types of lifestyle creep – Mr Stingy [32]
Risks retirees face – Humble Dollar [33]
Does BlackRock love me? – Fortunes & Frictions [34]
The Internet, AI, and the madness of crowds [Podcast] – A Long Time In Finance [35]
Capital gains, and the U.S. versus the rest – Simple Living in Somerset [36]
Naughty corner: Active antics
The Magnificent Seven: fortune or folly? – Morningstar [37]
AIC updates its ‘dividend hero’ investment trusts for 2024 – AIC [38]
Edge isn’t enough, you also need patience – Behavioural Investment [39]
Masterclass on US housebuilder D.R. Horton [Podcast] – Business Breakdowns [40]
Signs of a good investment process – Flyover Stocks [41]
Why quality stocks do so well – Klement on Investing [42]
Gold’s record-setting pace is exuberantly rational – Bloomberg via WM [43]
Out of office mini-special
ONS civil servants threaten to strike over two days a week in the office – GB News via MSN [44]
What a $1 deal tells us about American’s office market – BBC [45]
The ‘standoff’ over what office buildings are worth – Axios [46]
Crypt o’ crypto
London Stock Exchange changes tack, will accept crypto-focused exchange traded products… – The Block [47]
…but FCA says they’ll be restricted to professional investors – FCA [48]
What’s behind the Bitcoin price surge? Vibes, mostly – Wired [49]
More people buy, number go up – Of Dollars and Data [50]
Kindle book bargains
The Success Myth by Emma Gannon – £0.99 on Kindle [51]
Eat Shop Save by Dale Pinnock – £0.99 on Kindle [52]
Lean In by Sheryl Sandberg – £0.99 on Kindle [53]
The Making of a Billionaire by John Caudwell – £0.99 on Kindle [54]
Environmental factors
Giant redwoods ‘thriving in the UK’ – BBC [55]
Next-gen battery tech: Reimagining every aspect of batteries – ArsTechnica [56]
Eight ways to overhaul the UK’s inadequate sewer system – The Conversation [57]
The rewilding project bringing ancient cows back to Portugal – BBC [58]
Welsh valleys rank surprisingly highly for UK biodiversity – Nation Cymru [59]
Internet is dying mini-special
AI-generated spam is killing the Internet, aided by big tech – Ed Zitron [60]
Mr Beast is killing YouTube, aided by YouTube’s algorithm – Polygon [61]
Off our beat
The dirty secret about how our hands spread disease – The Smithsonian [62]
Financial nihilism – Epsilon Theory [63]
End phone-based childhoods now – The Atlantic [64] [h/t Abnormal Returns [65]]
The 20-5-3 rule for spending time outdoors – Art of Manliness [66]
How to rewrite the narrative on aging [Podcast/transcript] – The Good Life Project [67]
Choose your chimps carefully – A Teachable Moment [68]
The world’s coolest streets in 2024 – Time Out [69]
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 [70]
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