Scottish Mortgage Investment Trust (SMT) has announced a minimum £1bn share buyback programme which it intends to complete over the next two years – the largest ever repurchasing programme in absolute terms in the investment trust sector.
The £10.9bn trust’s board said it is in a strong position to repurchase shares, having paid down debt in recent months to strengthen its balance sheet, as it looks to narrow its 15.1% discount.
Justin Dowley, chair of Scottish Mortgage, said: “We remain committed to using share repurchases strategically to enhance liquidity in our shares and to seek to facilitate trading around net asset value. Our company has a strong balance sheet, and its portfolio companies are delivering strong operational results.
“We are acting upon this investment opportunity by materially increasing the capital available to our liquidity policy over the next two years with the aim of maximising returns for our shareholders.”
Analysts react
The trust has outperformed over the past 10 years, delivering a total return of 359%, while its share price has risen 291%. This compares to the FTSE All-World Index which was up 211% over the same period to 29 February.
However, in recent years SMT’s performance has lagged amid a tough macro environment for growth stocks.
Reacting to the announcement, Markuz Jaffe, analyst at Peel Hunt, said the buyback programme may help to reassure the market.
“While we note that Scottish Mortgage has already been buying back shares, a significant commitment to tackling the discount in both absolute monetary terms and as a percentage of the company may help to provide reassurance to the market around capital allocation discipline and longer term ambitions for addressing the relatively weak share price, with today’s commitment potentially representing a material step-up in pace of buybacks compared to recent months.”
Meanwhile, Quoted Data analysts said they were ‘pleased’ to see the board stepping up efforts to address its discount.
“It is no secret that, on the back of its very strong performance, SMT raised a lot of money from investors, when interest rates were low and its strategy was very much in favour. We have long believed that where funds have taken in a lot of capital in the good times, they should also be prepared to provide their shareholders with liquidity when times are tougher and the fact that SMT has some illiquid assets does not make it immune from this,” the analysts said.
“Irrespective of the underlying asset class, buybacks should always be done in a measured way that also protects shareholders’ interests. It can be harmful to shrink a fund and make it subscale and, for funds with illiquid assets, value could be eroded should a trust aggressively fund buybacks to the extent that it does not have sufficient cash to fund follow on investments when needed.
“Size is not an issue for SMT and the board and manager have clearly been cognisant of the risk of not being able to provide liquidity where required. A bigger concern for us is the level of buybacks that SMT is committing too. £1bn sounds like a lot but is around 9% of the fund’s market cap today, or 4.5% per year once this is spread over two years.”
They added: “This is a decent start and should shift the discount but may not be enough to move it back to where it has traded historically. However, with inflation and interest rates past their peak, SMT’s style could come increasingly back into favour. If so, it may not need all of that firepower and it might not be so long before it is issuing stock and growing again.”
As of 10:30am, the trust’s share price had risen 2.7% since the start of the day’s trading.
