AI stock market concept
Baillie Gifford’s flagship trust is seizing the opportunity to buy its own portfolio on the cheap / Image source: Adobe
  • ‘At least’ £1 billion earmarked for buy-ins
  • Portfolio delivering strong results
  • Signals confidence in portfolio valuations

Fallen growth star Scottish Mortgage (SMT) has set aside at least £1 billion for share buybacks over the next two years as the FTSE 100 trust seeks to narrow its wide share price discount to NAV (net asset value), news which sent the shares up 2.1% to 797.2p on Friday morning.

Following a balance sheet strengthening, Baillie Gifford’s flagship fund is seizing the opportunity to buy its own portfolio for less than the market price in a move demonstrating confidence in the underlying valuations.

While the backer of ‘exceptional’ growth companies, among them Nvidia (NVDA:NASDAQ), Tesla (TSLA:NASDAQ) and Amazon (AMZN:NASDAQ), boasts a terrific long-term track record, the shares are 50% below their late 2021 peak after performance was hit by the growth sell-off induced by rising interest rates.

Concerns over its exposure to unquoted investments, a part of the portfolio which includes SpaceX, Northvolt and Tempus Labs, have also weighed on sentiment towards Scottish Mortgage, leaving the shares languishing at a double-digit NAV discount.

STATEMENT OF INTENT

Scottish Mortgage explained that its public and private portfolio is delivering ‘strong operational results’ with free cash flow from the portfolio companies having ‘more than doubled over the past year’.

Given this reassuring backdrop, a further strengthening of the balance sheet over recent months and a lowered level of unquoted exposure, the board plans to take ‘more concerted action’ to address the discount.

Scottish Mortgage, which has already bought back £353 million of shares in the past two years, highlighted that if the full £1 billion was repurchased at current market levels, the level of private companies would tick up from the current 26.2% to 28.3%.

WHAT DID TOM SLATER SAY?

Tom Slater, manager of Scottish Mortgage, commented: ‘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.’

He added: ‘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.’

AstraZeneca’s lung cancer treatment seen as breakthrough immunotherapy

EXPERT VIEWS

Numis said the buyback decision is ‘excellent news for Scottish Mortgage shareholders’ and it was ‘positive on the prospects for the portfolio’. Scottish Mortgage ‘warrants a place in investors’ portfolio for its unique mandate focused on investing in companies that have the potential to deliver exceptional growth’, enthused the broker.

Peel Hunt analyst Markuz Jaffe said: ‘Whilst 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.’

Russ Mould, investment director at AJ Bell, commented: ‘The trust says its portfolio is doing well enough to warrant budgeting £1 billion for buybacks over the next two years. That’s 9% of the entire market value of the trust, making it is a significant commitment. It suggests the board thinks the trust is incredibly cheap - it was trading on a 15% discount to the value of its underlying assets last night.

‘However, it also raises a key question - wouldn’t that money be better deployed into new investments to generate future returns? Investment trusts are constantly judged on their discounts or premiums to NAV and Scottish Mortgage clearly wants to lift itself out of the bargain bin.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.

LEARN ABOUT SCOTTISH MORTGAGE

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account. AJ Bell logo

Issue Date: 15 Mar 2024