Cherry Reynard, for AIC Compass, 5 April 2024:
In March, Scottish Mortgage Investment Trust announced a £1 billion share buyback programme, designed to narrow its persistent discount to net asset value. At a time when investment trust discounts are wide relative to history and arbitrageurs are hovering over the sector, it is one of a number of trusts that have decided to buy back shares. But will it make a long-term difference to share prices?
The Scottish Mortgage programme will take place over two years and tops up the £350 million in buybacks it has done since 2021. Markets have greeted the news warmly, with the share price rallying 11% since the announcement..
What are buybacks?
Share buybacks are where an investment trust repurchases its own stock, reducing the total number of shares outstanding..
A bigger question is whether it works. The answer is not totally straightforward. Matthew Read, senior analyst at QuotedData, says: “Discounts expand when there is an excess supply of shares in the market relative to demand. Buybacks help mop up some of that excess supply. That said, the long-term effectiveness of buybacks really depends on the factors creating that excess supply in the first place. If there is some form of structural issue, perhaps an inappropriate fee structure or a poorly performing manager, no amount of buybacks are likely to stem the flow of investors wishing to exit. Boards need to address these issues first.”
He says buybacks are best employed to deal with a modest imbalance of supply and demand in the normal course of trading. “Alliance Trust, for example, regularly buys back shares when its discount is above 5% and has been very successful at keeping its discount around this level,” he adds.
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