What could Elliott’s stake in Scottish Mortgage mean?
News emerged last week that US hedge fund and activist investor Elliott Investment Management has taken a £600m stake in Scottish Mortgage Investment Trust. But what could this mean for the trust?
The 5.04 cent stake now makes Elliott the largest shareholder in the Baillie Gifford-managed trust.
The second largest investment trust in the UK, Scottish Mortgage is known for its holdings in private unlisted companies such as Space X and Bytedance, the owner of Tiktok.
The investment trust’s share price is up 11 per cent over the last month, mostly boosted by news earlier this month that it would be undertaking a £1bn share buyback programme over the next two years.
However, it is still down 42.5 per cent since its peak in November 2021. Its discount, or the value of its assets compared to its share price, currently sits at just under eight per cent.
Elliott has a long reputation for buying stakes in what it sees as underperforming British companies and forcing them to make changes, most recently in its failed attempt to buy Curry’s last month.
In the investment trust world, the hedge fund famously took down Katherine Garrett-Cox, the CEO of Alliance Trust, in 2016 due to her oversized pay package and the trust’s poor performance.
Stifel analyst Iain Scouller said it was likely that Elliott will “come up with a list of suggestions” on how Scottish Mortgage can improve shareholder value soon, rather than simply trying to make a profit on its shares.
Sources close to Elliott told the Sunday Times that the activist investor thought the trust was undervaluing its unlisted holdings, and should be reassuring the market of their value.
This could be done through share buybacks, with Dan Coatsworth, investment analyst at AJ Bell, arguing that Scottish Mortgage’s recent buyback announcement could have been “a defence mechanism” to prevent meddling from Elliott.
“It is feasible to suggest that Elliott could call on Scottish Mortgage to focus more on companies that already generate profit or at least have a growing revenue stream rather than simply a concept,” said Coastworth.
Since the trust focuses strongly on blue-sky companies, it was able to flourish in the era of low-interest rates. But now rates have risen and the economy has declined, the trust may have to abandon “bonkers ideas” such as flying taxis and 3D-printed rockets, Coastworth added.
However, Coastworth suggested that the trust might push back against these suggestions, given that “private valuations have come under pressure so if anything, Scottish Mortgage could go hunting for bargains”.
“If it reduced unquoted exposure and focused on more profitable businesses there is a danger it could get lost in the crowd of generic tech funds and trusts,” he added.