Number of investment trust share buybacks hits record high but effectiveness called into question

Cristian Angeloni, Investment Week, 09 May 2024:

Share buybacks carried out by investment trusts reached a record high in 2023..

The rationale behind share buybacks stems from investment trust boards’ urge to proactively attempt to narrow discounts.

At the end of October 2023, the average investment trust discount hit 16.9%, the widest month-end disparity since 31 December 2008 (when discounts hit 17.7%), according to data from the Association of Investment Companies.

However, the effectiveness of share buybacks has been called into question, since many investment trusts either failed to narrow their discount or the narrowing was not as significant as intended.

Emma Bird, head of investment trust research at Winterflood Securities, argued the last two years showed buybacks alone “are unlikely to significantly narrow a fund’s discount”, as several trusts which embarked on the programme are still struggling with significant discounts 18 months on.

But she noted there are a number of advantages to share buybacks, including the demonstration of a board’s “confidence in the portfolio” as well as the valuation opportunity presented by the share price discount to net asset value.

Matthew Read, senior analyst at QuotedData, consequentially argued investment trust boards can and should be strategic about the potential uses and reasons to deploy buybacks.

For instance, if an investment trust has a “structural issue”, such as an inappropriate fee structure or a poorly performing manager, “no amount of buybacks or tender offers are likely to stem the flow of investors wishing to exit”, Read argued.

But if the issue at hand is to do with supply, he said “mopping up that excess” via buybacks or tenders “can make a lot of sense”.

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