Unlike investment funds, trusts can trade at a discount or premium to the underlying assets which can be to the advantage of potential buyers but a thorn in the side for existing shareholders and trust boards alike.

Poor performance is often a key factor driving the share price below NAV (net asset value).

Scottish Mortgage Trust (SMT) and multi-manager Witan Investment Trust (WTAN) sit on double-digit discounts to NAV following a stint of poor performance, but both are taking radical action to address the situation.

The board of Scottish Mortgage has taken the bold decision to buy back ‘at least’ £1 billion-worth of shares over the next two years.

The amount is significant in terms of the size of the portfolio, representing nearly 8% of the £13 billion of net assets and 9% of the company’s market capitalisation at the time of the announcement.

Having strengthened its balance sheet, Baillie Gifford’s flagship fund is seizing the opportunity to buy its own portfolio for less than the market price in a move demonstrating confidence in the underlying valuations.

The company noted strong operational performance in the trust’s public and private portfolios which has resulted in free cash flow more than doubling over the last year.

Tom Slater, manager of Scottish Mortgage, believes the stock market has yet to fully recognise this progress, which provides the opportunity to buy the portfolio for less than it is worth, create better liquidity in the shares and augment shareholder value.

Scottish Mortgage, which has already bought back £353 million of shares in the past two years, highlighted that if the full £1 billion was repurchased at current market levels, the level of private companies would tick up from the current 26.2% to 28.3%.

Meanwhile, the board of Witan has taken the opportunity to review the company’s management arrangements following the retirement of long serving chief executive Andrew Bell and is inviting proposals for the future management of the portfolio.

Chair Andrew Ross said although the trust has performed in line with its equity benchmark since a major strategic shift to a global equity, multi-manager approach in 2004, recent years had seen considerable changes in markets, competition, regulation, and governance.

‘These pose new investment and communication challenges for independently managed investment trusts to address successfully and cost-effectively,’ added Ross.

Numis believes there will be ‘significant’ interest in the mandate given its scale, with net assets of £1.7 billion and a market cap of £1.5 billion.

Possible bidders include JPMorgan Global Growth and Income (JGGI), which has been an active consolidator in the sector, and Alliance Trust (ATST), which operates a similar mandate. 

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