Investment trust picker Peter Hewitt believes the tide may finally be turning for Scottish Mortgage (SMT ), the £11bn global growth trust, following a challenging period.

While the shares jumped over 5% on Friday after the board announced it would make at least £1bn available for share buybacks over two years in a bid to reduce its double-digit discount, Hewitt is not convinced the move will achieve the desired result. Instead, he hopes a general improvement in net asset value (NAV) performance, supported by a change in sentiment, will underpin the shares from here.

‘Share buybacks tend not to have much effect on the absolute level of discount,’ he explained. ‘It is, however, a good use of Scottish Mortgage’s resources in the sense that if the board and managers like the portfolio, and I presume they do, here is a chance to acquire it at a 15% discount which is accretive to NAV.’

Hewitt started adding to his Scottish Mortgage position for the £87m CT Global Managed Portfolio Growth (CMPG ) trust in January, having sold most of the stake two years ago. While the shares fell some 38% over this period, Hewitt notes the performance of the underlying portfolio has ‘gone sideways’.

‘There has been a lot written about Scottish Mortgage but to be fair to it, it hasn’t lost a lot of money since then,’ he said.

After attending a seminar with fund managers Tom Slater and Lawrence Burns in January, Hewitt said they appeared to be on the front foot for the first time in two years. He has been encouraged by the strong performance of top holdings chipmakers ASML and Nvidia and feels excited about the trust’s unlisted investments (even though he acknowledges this has been a point of concern in recent years).

If market conditions remain positive, there could be potential IPOs for SpaceX and ByteDance in the near future, which might provide a performance boost.

‘These are huge companies with billions of revenue and profit,’ Hewitt said.

‘In my opinion, SpaceX will have quite a big uplift this year in its valuation, and I think it will not be long until it has an IPO.’

Hewitt (pictured below) also highlights the trust’s stellar returns of about 500% since CT Global Managed Portfolio Growth first invested in April 2008. He currently has 2.4% of the portfolio in Scottish Mortgage, up from 1.7% last November, and putting it back in his top 20 holdings. Back in May 2021, the trust was his third-biggest position at 4% of assets.

How to make money

Other growth-focused trusts like Allianz Technology (ATT ), Polar Capital Technology (PCT ) and Biotech Growth (BIOG ) have faced similar challenges in a rising interest rate environment. Investors have reassessed the valuations of the fast-growing companies they invest in because they are based on the promise of future earnings, which are worth less when interest rates rise.

However now that interest rates are likely to start coming down, Hewitt said that all of these trusts merit a place in the CT Global Managed Portfolio Growth portfolio. He has been adding to all of them as well as Monks (MNKS ), Scottish Mortgage’s smaller and more diversified stablemate.

‘Trusts like Scottish Mortgage, Allianz Technology, Polar Capital Technology and Biotech Growth are where you make multiple times your original investment over a decade or so,’ he said.

Time to face the music

Elsewhere in the growth portfolio, Hewitt owns Hipgnosis Songs (SONG ), which he says is shaping up to be one of his worst investments. He has held it since its IPO in 2018.

Earlier this month the NAV of the music royalties fund was slashed by 33% by new valuer Shot Tower Capital. The board also announced that dividends would be scrapped for the foreseeable future to allow them to pay down the fund’s $674m debt pile, and on Monday revealed another 7.5% writedown over ‘double counting’ of income.

He puts these problems down to management failings under Merck Mercuriadis’s Hipgnosis Songs Management (HSM) and the previous board who let debt run too high.

‘It would not surprise me if this latest valuation is overly conservative,’ Hewitt said. ‘If you were to say to the top shareholders that they could have 92p per share tomorrow, you would have to get out of the way as there would be a stampede for the door.’

The new board is currently deciding whether to wind up the music royalties fund; sell the assets to bidders and return capital to shareholders; or to appoint a new manager to replace HSM.

Any incoming manager will face enormous challenges, although Hewitt believes there is value to be unlocked from the portfolio of 65,000 songs.

‘If they choose to manage through this, there will be a monster long court case with Mercuriadis which will be costly and bad publicity,’ he said. ‘And then who do you get in to run it? It could be the guy who managed Round Hill Music Royalty Fund [Josh Gruss]. You would have to evaluate that on what we saw with the investment trust and what they intended.

‘It is sad because I think the underlying portfolio is doing quite well and recent transactions infer that quite high values can be obtained for certain catalogues, so there could be upside to the NAV in that regard. But this is really messy and it is going to take a while.’

Bargain hunting

With the average investment trust discount close to 16% at the end of February, according to broker Winterflood, Hewitt believes there are fantastic opportunities for bargain hunters.

Firstly, he said a number of private equity investment companies offer ‘outstanding value and decent growth prospects’, with discounts between 30% and 40% in some cases. For example, his growth portfolio owns Oakley Capital Investments (OCI ), private equity fund of funds Pantheon International (PIN ), and HgCapital Trust (HGT ).

Secondly, he is excited about the prospects of UK equity trusts, specifically those with a bias towards small and mid-caps, whose share price and NAV returns have lagged the FTSE 100 in recent years.

He believes this trend is starting to reverse and points to the double discounts on offer: the low rating attached to UK small and mid-caps, coupled with the wide trust discounts on offer.

‘Fidelity Special Values (FSV ) portfolio is on eight times earnings,’ the trust picker explained. ‘Aberforth Smaller Companies (ASL ) is on seven times earnings and the shares are on a 10% discount, so you are actually buying on a price-to-earnings of about six.’

The £57m CT Global Managed Portfolio Income (CMPI ) that Hewitt runs alongside CT Global Managed Portfolio Growth has disappointed over one and three years. Shares in the income portfolio are down 5% and 4.5% respectively. By comparison, the FTSE All-Share index is up 7.2% and 22.7% over the same time periods. The portfolio trades on a discount of 1.9%.

Meanwhile, shares in the growth portfolio are down 0.2% over the past 12 months and have fallen 1.8% over three years. The discount is 2.8%.

Although the last few years have been challenging, with portfolios hit by widening discounts and weak share prices in their investments, Hewitt said that the growth portfolio is starting to turn around and he is confident that the performance of the income portfolio will soon follow, which in the meantime offers investors a growing yield of 6.3%.

‘You can see valuations are towards one extreme,’ he said. ‘The underlying outlooks for the companies we invest in are beginning to pick up and I think we could do really quite well.

‘I think over the next one to two years we could see some decent performance from investment companies.’