Scottish Mortgage launches £1bn buyback programme in bid to cut discount

Scottish Mortgage lined-up its biggest ever share buyback programme on Friday, as Britain’s biggest investment trust attempts to cut its double-digit discount.

The trust has already bought back £353million of shares in the past two years, and will increase buybacks to at least £1 billion over the next two years, it told shareholders on Friday.

It is the largest share buyback programme ever in absolute terms in the investment trust sector.   

Scottish Mortgage’s board said it was making ‘more concerted action’ to address the 15 per cent discount to net asset value (NAV) at which the company’s shares trade.

Scottish Mortgage lead manager Tom Slater says market hasn’t recognised progress of portfolio companies

Buybacks are often used by companies who believe that their stock is undervalued. 

Scottish Mortgage said its buyback programme is a ‘strong demonstration of confidence in the underlying valuation of the portfolio.’

The investment trust sector has suffered from widespread discounts in recent months thanks to rising interest rates, which have increased the yield on cautious investments and weakened the case for higher-risk assets.

There has been particular concern over Scottish Mortgage’s exposure to unquoted investments and growth stocks.

The trust benefited from its holdings in the likes of Amazon, Nvidia and Tesla during the pandemic when growth stocks soared. 

But Scottish Mortgage Investment Trust shares plunged from around £15 to a low of 628p last May when the era of low interest rates came to an end. 

Shares have since recovered to around 792p and are up 17.6 per cent in the last year.

Tom Slater, lead manager of the trust said: ‘In a volatile period for growth investment, we own a portfolio of established companies achieving rapid expansion, propelled by enduring structural trends. 

‘Advances in foundational technologies are unlocking exciting new products, services, and business models. These well-funded public and private companies are shaping the future of the economy.

‘The stock market has yet to fully recognise their progress, which creates the opportunity for us to buy the portfolio for less than its market value. 

‘In doing so, we can provide liquidity and augment returns for our shareholders. We intend to pursue this opportunity with conviction.’ 

Jefferies analyst Matthew Hose said he expects the buybacks to help narrow discount levels but ‘there have been better uses of capital, such as debt repayment or private follow-ons.’

He added: ‘However, there is now headroom on both following a recovery in performance and action taken to reduce debt, with the private exposure (of GAV) and invested gearing (on NAV) becoming 28 per cent and 14 per cent, respectively, upon completion of the initial £1bn.’

This post first appeared on Dailymail.co.uk