Buybacks hit record highs

Investment trusts boards determined to tackle lowly valuations are continuing to buy back their own shares. Some 118 investment trusts repurchased shares in April, according to new data from Winterflood – that’s the highest number the analyst has noted since it began keeping records in 1996. In total, investment trusts bought £2.2bn worth of their own shares during the first four months of the year – more than twice as much as in the same period of 2023.

The aim of most buyback programmes is to bring the trust’s share price into closer alignment with the value of its assets. The structure of an investment trust – where investors buy shares on the stock market in order to secure exposure to the fund’s underlying assets – often gives rise to pricing anomalies. The share price of the trust may trade at a discount or premium to the value of its assets, depending on supply and demand.

Right now, the average investment trust trades at a discount of around 7.7%. Share buyback programmes aim to bring discounts down – boards reason that by reducing the number of shares in issue, they will tackle the imbalance between supply and demand. That should help the shares move to a price closer to their true value.

It's not an exact science – not least because buyback programmes do not take place in a vacuum. Share buybacks may not solve the issues that led to the discount developing in the first place, particularly where investor sentiment is the driving factor in a lowly valuation.

Indeed, on the face of it, this year’s ambitious buyback programmes haven’t achieved a great deal. By the standards of recent history, discounts remain wide, especially in some sectors such as UK All Companies (10%), Infrastructure (15%) and Property – UK Commercial (21%). 

That’s disappointing, particularly for investors holding shares that substantially undervalue the funds in which they’re invested. But many funds have been facing a perfect storm – a loss of confidence in the markets in which they’re invested, mixed up with doubts about their investment approach and questions about costs and governance. That will take time to unwind.
 

Nevertheless, there have been some high-profile buyback success stories. Funds such as Pantheon International and Ruffer Investment Company have seen their discounts narrow following buyback programmes. Scottish Mortgage, which launched the largest ever buyback in the sector earlier this year, is also seeing some signs of encouraging progress.

These cases show that buybacks can deliver immediate results in the right circumstances, even if other programmes take longer to achieve their goals. This is one reason why a growing number of investment trusts now have formal discount control mechanisms in place; these commit the funds to implementing buybacks in the event their discounts hit pre-defined levels. The aim is to signal to investors that the trust is committed to keeping its discount down.

In the end, the price of an investment trust share will always be affected by market shifts and changes in investor sentiment. Indeed, their structure provides a useful pressure valve for dealing with volatility. Still, the rise and rise of buybacks – and buyback policies – is good news. It should help to support investor confidence and, over time, reduce the volatility of valuations in the sector. Individual trusts will always fare differently, but aggregate discounts should begin to narrow.