Trust deal

Activist Elliott takes 5% stake in Scottish Mortgage

Tesla
Scottish Mortgage made big returns from investment in Tesla

US hedge fund and activist investor Elliott Investment Management has taken a 5% stake in Scottish Mortgage Investment Trust, managed by Edinburgh-based Baillie Gifford.

According to a stock market filing it crossed the 5% threshold on 19 March and its presence has raised the prospect of it demanding changes in personnel and in strategy as it did at Alliance Trust.

Elliott’s move comes only days after it abandoned efforts to buy UK electricals retailer Currys, and Scottish Mortgage’s announcement of an ambitious £1 billion share buyback programme.

The trust became known for the returns it made backing a number of hitherto unknown growth companies, particularly in the US. Its support for the likes of car maker Tesla and the vaccine firm Moderna made investment stars of its fund pickers.

But the tech downturn and general slump in stock markets has hit the trust’s price and it now trades at a discount to its underlying assets. The shares trade at about 40% of their peak in late 2021.

Dan Coatsworth, investment analyst at AJ Bell, says: “Only a week ago Scottish Mortgage announced plans to buy back at least £1 billion worth of shares, equal to 9% of the trust’s market value at the time of the news.

“That’s a chunky commitment and one has to consider if this decision was a defence mechanism should it have discovered Elliott was building a stake. Spotting an activist on the shareholder register can prompt a board to get one step ahead by second guessing what they want and beating them to it so as to avoid a public ridicule.”

Mr Coatsworth says the fall in the share price prompted “suggestions that Scottish Mortgage had been taking too many wild bets on blue-sky companies, ones that had an idea but were miles off making any money.

“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.

“That could spell an end to the bonkers ideas which Scottish Mortgage previously bought into, such as flying taxis and 3D-printed rockets. Having fewer unquoted stocks would mean in theory that its portfolio has more liquidity, should it need to exit any positions quickly.

“The investment trust’s strategy is to identify tomorrow’s winners and there are plenty of companies already on the stock market that could fit the bill rather than fishing around private businesses.”

He adds: “Investors need to understand what they are buying, particularly as there is a fear that many don’t appreciate it could experience more setbacks than a bog-standard equity fund.

“Ultimately, Elliott will have bought a stake to make money so it might start by focusing on the quick wins. It has form in the investment trust space, having spent seven years battling Alliance Trust in a fight that led to changes to the board of directors, the sale of its investment management subsidiary, a new multi-manager strategy and a narrowing of its discount to net asset value.”

SMIT’s largest current holdings include chip giant Nvidia Corp. and semiconductor machinery group ASML Holding.



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