Investment trust insider on significant discounts – James Carthew: Trusts like Scottish Mortgage could do more to narrow discounts
The widening of share price discounts across much of the investment company sector is costing investors dearly. For example, Scottish Mortgage’s (SMT) 13% discount represents a £1.6bn gap between the value being placed on the company by investors and the value ascribed to it by its directors.
I have been disappointed by the extent to which SMT’s discount has been allowed to widen, especially given the vast quantities of shares that it was issuing at a small premium to NAV not long ago. While SMT has been buying back shares – almost 24 million over 2022 or, at today’s price, £177m worth – perhaps not aggressively enough. Over the 12 months to 31 March, the global growth trust issued a net £361m worth of shares.
SMT’s private equity positions are revalued on a rolling three-month basis, so its net asset value (NAV) should be reasonably current. The £10.5bn closed-end fund does have to be mindful of its exposure to unlisted companies. There is a 30% limit on the trust’s exposure to private companies at the time of purchase, and at the end of September, this exposure was 31.8%, meaning it cannot add to these positions.
This is not a great position for the trust to be in. As fund manager Tom Slater noted in the trust’s annual report: at times of stress, the trust’s role in supporting younger loss-making companies becomes ever more critical. However, it is unclear to me how the Baillie Gifford flagship can do this considering its unlisted investments.
SMT also needs to be mindful of its gearing or borrowing. At the end of September, the trust’s potential gearing was 18% of NAV and actual gearing after cash was 16%. That may be higher now… read more here