by Faith Glasgow from interactive investor, 28th March 2023:
Share buybacks are used by investment trust boards to reduce the number of shares in circulation, as a mechanism for controlling the trust’s share price discount to net asset value (NAV)…
But how far does that work in practice?..
A recent report by broker Numis notes that buybacks were last year up by 39% compared with 2021…
Buyback activity was dominated by large equity funds – particularly growth-oriented global trusts, which had a horrible time as inflation and interest rates rose and investor sentiment turned against them…
Nonetheless, both Baillie Gifford-managed trusts have seen their discounts remain persistently wide, reflecting the extent to which the growth style has fallen out of favour…
Numis sees them as a “useful tool” in this context. “We believe boards should set realistic expectations, particularly that buybacks are unlikely to ‘march-in’ a discount, but can help limit discount volatility, improve liquidity and spreads, as well as giving confidence in the NAV and demonstrating a focus on shareholder returns,” the broker comments…
Do buybacks add value?
In general, investment trust analysts seem to regard buybacks as a positive for private investors. Pascal Dowling, a partner at broker Kepler Partners, observes that the fact that directors have the ability to repurchase shares and move discounts should be a reassurance to shareholders that they have some control over a trust’s fortunes…
Moreover, as James Carthew, head of investment companies at QuotedData, points out, if a board commits to buying back shares, “it can be a good indication that it feels the shares are too cheap and it is determined to do something about that, which is also an indicator that it believes in the accuracy of the NAV – both of which should be good for sentiment”.
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