by Jennifer Hill from interactive investor, 28th December 2023:
Risk-off sentiment has pushed investment trust discounts to historically wide levels and many boards have been proactively trying to address the issue.
This year will be a record for share buybacks with almost £3.5 billion of investment trust share buybacks in the first 11 months, data compiled by the Association of Investment Companies (AIC) shows…
An investment trust can use cash on its balance sheet to buy its own shares, which it then cancels to reduce the number of shares in circulation.
Buybacks are one of the key tools used by boards to narrow the trust’s share price discount to net asset value (NAV). This is especially true for trusts that have discount control mechanisms, which aim to stop a discount going over a certain percentage. Some have a “zero discount” policy and strive to ensure the shares trade close to their underlying NAV in normal market conditions. Only funds with highly liquid portfolios can contemplate such a policy, however.
Generally speaking, buybacks support the share price and improve investor sentiment. “A commitment to undertake buybacks can be a message from a board that it feels the shares are too cheap and it’s taking action to address that,” says Matthew Read, a senior analyst at QuotedData. “It’s also a strong indication that it believes in the accuracy of the NAV – both should be good for sentiment.”
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