Scottish Mortgage’s record buybacks indicate time has come to invest in £12bn global trust

Shares jumped 13pc after launch of £1bn programme and US hedge fund took a 5pc stake to become largest shareholder

Shares in Scottish Mortgage, the most heavily traded investment company, by UK private investors, have jumped 13pc after two startling developments this month.

A fortnight ago, the £12bn global investment trust, a FTSE 100 constituent, launched a record share buyback programme, promising to purchase £1bn of its shares over two years. By increasing buybacks, the trust hopes to achieve a couple of important aims: to prop up a share price that had fallen to a 15pc discount below the value of its investments; and demonstrate confidence in the valuation and prospects of the public and private growth companies picked by its fund managers at Baillie Gifford.

Last week, six days after this announcement, Elliott Investment Management, an aggressive US hedge fund, revealed it had become Scottish Mortgage’s largest shareholder after taking a 5pc stake in the global fund.

This was exciting, though possibly worrying, news.

New York-based Elliott is famed as an investment activist prepared to upset company bosses and governments worldwide as it chases down profitable trades.

Elliott’s arrival at Scottish Mortgage revives memories of a decade ago when it built a 20pc stake in Alliance Trust and persuaded its then board to sell businesses and adopt a panel of external fund managers before buying out its stake at a narrow discount.

Alliance’s performance has improved greatly since then. It sits second in its global sector, just ahead of Scottish Mortgage, with a five-year total return of 86.5pc.

It’s possible that Elliott, which first invested in Scottish Mortgage last year, will be a similarly productive thorn in the side of its board, having prodded its directors to escalate buybacks they had sent two years considering.

So far, both sides are working together, stressing their shared interest in narrowing the discount and improving shareholder returns.

Nabeel Bhanji, the Elliott fund manager who led the £600m swoop on the investment trust, said: “We are grateful for the dialogue we have had with the board and management of Scottish Mortgage in recent months.

“We strongly support the company’s recently announced £1bn buyback – the largest buyback programme ever announced by a UK closed-end fund – and look forward to continuing our engagement.”

Scottish Mortgage told us it treated Elliott the same way as any large shareholder.

“Both parties’ interests are aligned and each supports the company’s recent £1bn buyback announcement,” it said, adding: “The Alliance Trust situation was entirely different; the only two similarities are that it involves Elliott and an investment trust.”

Questor believes this is a turning point in its recovery from a 16-month crash that began in November 2021 when inflation and rising interest rates hit the fund’s highly-valued technology disrupters. At 884.4p, the shares have more than doubled since Questor first tipped them at 425.9p in Aug 2017.

We failed to take profits after internet stocks soared during the Covid lockdowns, inflating Scottish Mortgage’s market value to over £20bn when it peaked at £15.28. Readers who took our advice in September 2021 to buy at £13.84 are sitting on a 36pc loss.

However, the Baillie Gifford flagship is making a sustained recovery, up 44pc from May, when the shares sank to around a three-year low of 612p.

This is also 36pc higher than October, when we again recommended a buy at 651p on an 18pc discount. Over 10 years, Scottish Mortgage has been the best performer in its sector, returning over 355pc to shareholders, well ahead of the 222pc advance in the MSCI World index.

Tom Slater and Lawrence Burns, the fund’s managers, told investors this week they were “excited” and “enthusiastic” about opportunities offered by AI and the advances of ASML, the semi-conductor supplier, its top position at 8pc of assets, and Elon Musk’s Spacex, a 4pc holding.

With cashflow and profits from the portfolio surging, the outlook is brighter for Scottish Mortgage than it has been for some time. Investors should buy this high-risk, high-return fund for the long term but take profits when they occur.

Questor says: Buy

Ticker: SMT

Share price at close: 884.5p

‘This is a turning point in recovery from 2021 crash caused by rising interest rates and inflation’