Manchester and London (MNL), the tech-laden global fund spectacularly riding the artificial intelligence (AI) boom, has halted share buybacks and share purchases by insiders in an effort to preserve its investment trust status and avoid a damaging tax bill.
In its annual report issued yesterday evening the £331m company said the free float of shares held by the public was close to the minimum 35% threshold set by HMRC.
This is because of the 62% stake held by fund manager Mark Sheppard and his company M&L Capital Management, which have regularly bought the shares.
Falling below this level could mean Manchester and London would have to pay corporation tax on investment gains which it warned “could be detrimental to net asset value and shareholder returns”.
To ensure compliance with tax and listing rules the company said it would pause all share buybacks and purchases by its directors, fund managers and their associates until further notice.
The trust’s board and Sheppard are reviewing “structural options” that could permit a resumption of buybacks but this would not be a quick resolution.
Despite posting a second consecutive year of impressive results with a 33.6% investment return for the year to 31 July, following a 55.4% advance in the previous 12 months, shares in MNL ended the period on a 13.7% discount below net asset value.
That was virtually unchanged from the previous year despite the board buying back 1.8m shares which Sheppard likened to King Canute’s vain attempt to command the tide.
He claimed the discount “will only close when 10-year Treasury yields [an indicator of US borrowing costs] are clearly on a downward path AND growth shares are back in vogue,” noting that other tech trusts traded on similar discounts.
Sheppard defended his level of stock concentration with Microsoft and Nvidia representing 65% of the portfolio and the top five holdings accounting for 83% of net assets. “Sadly, we do believe the outstanding winners from the AI era may, in time, be counted on the fingers of two hands. So what are we meant to do: diversify to dilute performance? Punish our winners for proving they are elite?”
A final dividend of 7p per share and a special final dividend also of 7p were declared in line with last year.
MNL shares dipped 0.9%, or 8p, to 864p. They have soared around 416% over 10 years.
Our view
James Carthew, head of investment company research at QuotedData, said: “In Manchester & London’s impressive results, the chairman poses a question: Is the UK wealth industry’s regulation overly averse to volatile asset classes even though they have performed successfully? It is a reasonable question to ask; it does not really make sense that some of the best-performing investment companies are trading on wide discounts to net asset value. In MNL’s case the manager has been buying shares to take advantage of a wide discount (and is sitting on a decent profit on these). The board now feels that the company’s free float is too low and is suspending buybacks and insider purchases. One solution might be to find a way to make the trust a lot larger – through M&A perhaps, which could boost the free float.”
