Scottish Mortgage (SMT), Baillie Gifford’s flagship investment trust and the largest trust in the investment companies sector, has announced that Elliott Associates, the US activist hedge fund, has acquired a 5% stake in the trust. The announcement, which came out last night after the market had closed, revealed that Elliott has bought nearly 0.5% of SMT with a further 4.57% in equity swaps, which pushed it just over the 5% threshold.
Elliott Associates – a history of activism
Based in Delaware in the US, Elliott was founded by Paul Singer in 1977 and is not afraid of taking on large quarry. It is perhaps best known for buying distressed emerging market bonds and then launching litigation in the international courts against both Peru and Argentina after they had defaulted on their debts. More recently, it launched a bid to takeover the UK high street electrical retailer Currys. Elliott is an active activist, with its number of campaigns comfortable outstripping other activists. This has led the FT to describe it as “the McDonald’s of activism”, saying that in the world of investor activism “the New York hedge fund group has become everything that McDonald’s is to burger restaurants”. The argument goes that the Golden Arches and Elliott have created international brands representative both of themselves and their wider sectors; they market familiar products of consistent quality manufactured from local ingredients and some people heartily dislike them.
However, for followers of the investment company space, it is best remembered for its dogged and ultimately successful campaign against Alliance Trust (ATST). Elliott built up a significant stake over a number of years and eventually secured two seats on the board. Up until this time, ATST’s former chief executive, Katherine Garrett-Cox, had allowed ATST to become quite a complex financial beast with its fingers in many pies but this wasn’t reflected in its share price with ATST trading at a substantial discount, which allowed Elliott to get a foothold.
Under pressure from Elliott, Garrett-Cox’s empire was slowly unpicked and she eventually left the firm. The adoption of the multi-manager approach that ATST now follows and its policy of defending a 5% discount are all shareholder-friendly measures that came about because of Elliott’s efforts.
What next for SMT?
Given Elliott’s history of activism, the question everyone is now asking is what will they do next with Baillie Gifford’s flagship fund? Does it have plans to mount a similar campaign targeting SMT in the way that it did with ATST? Or does it think that SMT’s style is out-of-favour and could come back strongly as interest rates continue on their path of descent, allowing it to capitalise on a narrowing of the discount? It is worth noting that this is not the first time that SMT has had US activists on its register. Saba Capital, which has built up a number of stakes in UK listed investment companies, acquired a stake in SMT last year. It has, in some instances, agitated for measures – such as the larger tender it campaigned for and achieved with European Opportunities Trust – but subsequently disposed of its SMT stake without making any visible waves.
The announcement of Elliott’s arrival is interesting as it comes just after SMT announced a significant leg up in the amount it is prepared to allocate to buybacks in a bid to control the discount (at least £1bn over the next two years – click here to see our coverage of this). This was well received by the market and narrowed the discount to around to 10%.
Elliott will almost certainly have been building up its stake at larger discounts and should already be standing at a profit. However, given the timing of this latest announcement, it is quite possible that SMT’s board has seen Elliott coming and has decided to act themselves before being backed into a corner and forced to do so. There may be an analogy between it and 3i, which changed very successfully when it saw Sherbourne Advisors amassing their tanks on its lawn. 3i changed to such an extent that Sherbourne had to switch tack and ended up looting Electra Partners instead. Given SMT’s additional commitment to buybacks, Elliott maybe happy to sit there quietly if the discount continues to narrow and it is making a profit.
However, the presence of one activist often attracts other activists and discount players, and SMT is still vulnerable while growth investing remains out of favour and its performance is more muted than the impressive numbers its followers have been used to. Ultimately, a return to form would almost certainly resolve this problem as Elliott and co would fly off in search of another target.