Under siege… but will US activist help revive Scottish Mortgage investment trust?

Scottish Mortgage Investment Trust (SMIT) was once the toast of the City but its fall from grace over the past two-and-a-half years has upset many retail as well as institutional investors.

Renowned for its stock picking under star investment manager James Anderson, who left in 2022 after 21 years at the helm, SMIT was the go to fund for UK investors wanting access to high growth global tech firms.

But since its peak in November 2021 its shares have fallen some 40 per cent to 875.8 p as higher interest rates triggered a sell-off in technology stocks.

There have been signs of recovery since the turn of this year but the share price weakness left the Edinburgh-based investment trust vulnerable, and last Friday Elliott Management pounced.

The US hedge fund revealed it is now the company’s largest shareholder with a 5 per cent stake worth around £600million.

Elliott has been slowly building the stake since the end of 2023, buying 0.5 per cent of the trust’s shares as well as an additional 4.75 per cent in equity swaps, crossing the 5 per cent threshold on March 19.  

The fund has a formidable reputation – an activist investor that has never been afraid to implement ‘hardball tactics’ in order to get what it wants.

Owned by Paul Singer, who founded the company in 1977, the firm built its reputation as an investor in distressed government debt.

In the UK, Elliott has clashed with GSK – at one point launching a campaign to determine if chief executive Emma Walmsley was the right person to lead the drug company – as well as energy firm SSE and miner BHP.

Elliott also owns book shop Waterstones and was recently unsuccessful in a bid for electrical retailer Currys.

Elliott has history in Scotland, taking aim at Dundee-based Alliance Trust more than a decade ago. It invested in 2010, criticising the investment group’s poor performance, high costs and loss-making subsidiaries, including Alliance Trust Investments and the online trading platform Alliance Trust Savings.

The campaign broke into open warfare in 2015 with the ousting of chief executive Katherine Garrett-Cox and the clearing out of the board.

Alliance, like SMIT, had a big retail base and after six years of turbulence eventually agreed to buy out Elliott’s 19.75 per cent stake.

One investment advisor did not rule out similar trouble at SMIT, saying: ‘These two who are now involved with each have very different cultures. 

SMIT is part of the Scottish establishment, whereas Elliott is aggressive and proud of it.’

So far the language between Elliott and Scottish Mortgage is cordial, with the two sets of management on speaking terms. 

Elliott partner Nabeel Bhanji said on Friday: ‘We are grateful for the dialogue we have had with the board and management of Scottish Mortgage in recent months and look forward to continuing our engagement.’

Justin Dowley, who chairs SMIT, replied: ‘We have been in contact, as we often are with shareholders.’

But for how long the discourse remains civil is yet to be seen.

According to sources, Elliott wants SMIT to lift the valuation of its portfolio by selling off chunks of its investments.

In particular focus are the firm’s unlisted stocks which now make up 35 per cent of the portfolio. Among them are Bytedance, the owner of Tik Tok, and Elon Musk’s Space X.

The fund’s growing appetite for private companies has drawn criticism from analysts and investors alike and means it runs at a persistent discount to net asset value despite the company earlier this month saying it would make £1billion available for share buybacks over the next two years.

Elliott believes the trust has undervalued these private assets and that it should reassure the market about their value by selling portions of its holdings when companies such as space exploration technologies firm Space X do private share buybacks.

Neil Wilson, an analyst at Markets.com, said: ‘The unquoted element of the portfolio has left them exposed. Elliott has spotted a valuation weakness and is targeting it.’