Scottish Mortgage Investment Trust to buy back £1 billion shares

Scottish Mortgage Investment Trust was one of the FTSE 100 top gainers on Friday after the technology-focused trust announced a major share buyback.

The lack of interest in the Scottish Mortgage Investment Trust has become too much for its managers, who have announced a £1 billion share buyback over two years.

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Despite holding some of the world’s leading technology companies, the trust is trading at over a 10% discount and the team is now taking matters into their own hands by buying back shares to help reduce the discount.

Scottish Mortgage became an investor favourite by picking major success stories in the technology space providing investors with substantial returns. It has since fallen out of favour as Russ Mould, investment director at AJ Bell, explains:

“Once a darling of the stock market during the red hot ‘go-go growth’ phase that was propelled by very low interest rates, the trust fell out of favour after central banks started to lift the cost of borrowing and one of its long-standing fund managers departed. The new team have been trying to make a comeback ever since, but it’s been hard going. The latest bright idea is to throw a massive wad of cash at share buybacks.

“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.”

Mould questioned the management team’s motivation, picking up on the decision to buy back its own shares as opposed to making more investments.

“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.”

The decision doesn’t instil confidence in the management’s stock-picking capabilities, given they were heavily underweight AI-focused stocks and are now choosing to avoid making new investments in favour of buying back their own shares.

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