Baillie Gifford’s director of marketing and distribution has said there is little evidence to suggest share buybacks protect the ratings of investment trusts, although Winterflood data for Citywire shows the Scottish asset manager is no outlier compared to peers.

Speaking at a private investor forum, James Budden (pictured below) noted that sentiment, demand and performance would be the main drivers of a rerating across the investment trust sector in general, but especially for Baillie Gifford given they had been ‘pretty negative’ over the last couple of years.

He added that the particularly wide discounts across their range of equity trusts were ‘more a symptom of being stuck in a situation where investors are very short-term and they’re not making big investment decisions from the top down.’

Winterflood data shows that the board of the flagship global equity trust Scottish Mortgage (SMT ) spent £231m, or 2% of share capital, buying back shares last year and £80m year to date. The shares remain at an 18% discount to net asset value (NAV), a level last seen during the global financial crash in 2008.

This is roughly in line with its global equity peers, as F&C Investment Trust (FCIT) and Bankers (BNKR ) bought back 1.6% and 1.4% of their shares respectively in 2022, while AVI Global (AGT ) bought back 4.1% and Alliance Trust (ATST ) bought 5%. 

SMT has been trading below NAV since early 2022 as rising interest rates impacted its portfolio of largely unprofitable growth companies and markets questioned the valuations of private companies, which make up 30% of SMT’s assets.

However, the board of the FTSE-listed company has been disciplined about buying back shares even when the £9.6bn trust was trading at a premium, with total repurchases topping its sector from 2020-2022 and second in 2019, according to Numis data.

The graph below shows that share buybacks can only do so much to narrow the discount. 

Scottish Mortgage fights an uphill battle

 

Source: London Stock Exchange; Morningstar, as at 12 September

In a report earlier this year, Numis analyst Ewan Lovett-Turner noted that shareholders would likely prefer to see increased share buybacks from the board given that the shares have persistently been about 20% below par. However, SMT’s gearing, or borrowing, and exposure to unquoted investments naturally limits the ability to buy back shares in difficult conditions.

‘“Buybacks don’t work” is a view we hear from some boards and management groups, particularly those investing in less liquid, alternative assets,’ Lovett-Turner said. ‘We do not dispute that buybacks alone are unlikely to solve a persistent discount, but we do believe that buybacks are a tool that should be more widely used.’

He went on to highlight the benefits of buybacks which include limiting discount volatility and improving liquidity in a company. He added that a buyback can demonstrate board confidence in the NAV as it shows they believe in its accuracy and can act as a tool to demonstrate boards will act in shareholder interest.

Across the industry there were £395m worth of buybacks in August, bringing the total for 2023 so far to £2.4bn, a 47% increase compared to the same period in 2022, according to Winterflood. 

Aside from SMT and its sole income trust Scottish American (SAIN ), or ‘Saints’, which has not seen its discount widen to the same extent, Baillie Gifford boards have bought back shares at eight of their 11 trusts in the last two years.

These include their two Japan trusts, Shin Nippon (BGS ) and BG Japan (BGFD ), along with BG UK Growth (BGUK ), Pacific Horizon (PHI ), BG European Growth (BGEU ), US Growth (USA ), Monks (MNKS ) and Edinburgh Worldwide (EWI ). 

Three years of pain for shareholders

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Trust	Ticker	3-year returns	Benchmark
Schiehallion Fund	MNTN	-48.93	None
Edinburgh Worldwide	EWI	-43.20	S&P Global Small Cap
Baillie Gifford China Growth Trust	BGCG	-40.21	MSCI China All Shares
Baillie Gifford Shin Nippon	BGS	-33.96	MSCI Japan Small Cap
Baillie Gifford US Growth	USA	-33.87	S&P 500 Index
Baillie Gifford European Growth	BGEU	-23.58	FTSE Europe Ex UK
Scottish Mortgage	SMT	-23.55	FTSE All World
Baillie Gifford Japan	BGFD	-13.23	TOPIX Total Return
Keystone Positive Change	KPC	-12.93	MSCI AC World
Monks	MNKS	-11.92	FTSE World
Baillie Gifford UK Growth	BGUK	-6.62	FTSE All Share
Pacific Horizon	PHI	3.18	MSCI All Country Asia ex-Japan
Scottish American	SAIN	26.11	FTSE All World

Source: Morningstar, as at 11 September

Budden advised investors to sit tight as they wait for the ‘frustratingly intangible’ future when growth will gather momentum.

‘In the meantime, we need to look forward to greater demand, improved performance and all the right things coming to fruition,’ he said. ‘I think things will change very quickly in the same sense that it doesn’t take a tremendous lack of demand for things to drift. Actually, things will improve on the back of not very much interest.’