Broker Peel Hunt has thrown down the gauntlet to the boards of investment companies by proving the success of buyback programmes on discounts and argued that those trading at 30% below par would be hard-pressed to find a better investment than their own shares. 

Writing as the Association of Investment (AIC) confirmed that the average sector discount had hit 2008 lows, analyst Tom Pocock said boards have spent more than £3bn through regularly buying back to date in 2023. Equity trusts took up the lion’s share buying £2.6bn, with the remaining £700m coming from alternatives, which includes private equity.

Peel Hunt calculated the figures based on regular buyback programmes and did not include large set pieces, such as Pantheon International’s (PIN) mammoth £200m programme.  

Aside from an attempt to narrow the discount, Pantheon’s buyback plan has been seen, in part, as a savvy investment decision as the company flagged on a 43% discount when it was announced. This is a view echoed by Peel Hunt, who highlighted the returns that can be generated by buying your own shares. 

Pocock explained that buying back discounted shares and cancelling them allows the trusts to immediately benefit from marking those assets up to their true value. 

He gave an example of a trust with net asset value (NAV) per share of 100p but trading on a 30% discount, or a share price of 70p. The trust would get a 30p uplift for every share they buy. 

In this way a trust trading on a 30% discount can buy back its own shares and earn a return on investment of more than 40%, while buying back 15% of shares (the typical shareholder authority limit) at a 30% discount, could deliver 5% of NAV accretion.  

‘Going forward, even accounting for the rising cost of debt and potentially attractive investment opportunities, we see it as increasingly difficult for a company to argue that new investments are significantly more compelling than buybacks, as a company’s discount starts to widen beyond circa 30%,’ said Pocock. ‘Indeed, at around a circa 40% discount, the equivalent return on investment that would have to be achieved in order to surpass a buyback is a tall order.’

Other incentives for boards include reducing discount volatility, with those that have a share buyback programme bringing volatility down to 3%, while those that do not inflict 9% of volatility on their shareholders. 

The largest buyback spenders in 2023

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	Net assets (£m)	Total (% of share capital)	Current discount (%)
Troy Income & Growth (TIGT )*	160	16	7.4
Mid Wynd International (MWY )*	394	15	1.4
Capital Gearing Trust (CGT )*	1,096	12	4
Biotech Growth Trust (BIOG )	304	12	8.4
Riverstone Energy (RSE )	567	11	47.5
Worldwide Healthcare (WWH )	2,035	10	11.3
Herald (HRI )	1,134	9	15.1
Abrdn UK Smaller Companies Growth (AUSC )	385	9	13.8
MIGO Opportunities (MIGO )	75	8	2.2
Rights & Issues (RIII )	118	8	12.7

Source: Morningstar, Peel Hunt, Numis. Data for 2023 to 3 November 2023. *Denotes zero discount policy.

Of the conventional equity trusts, those that have bought back at least 5% of shares and £25m by value (excluding those with zero-discount policies) have experienced a 2% less severe discount widening than their respective peer groups. Pocock added that there was a ‘meaningful’, or 50%, correlation between the proportion of shares bought back and the relative rating.

Excluding FTSE 100-listed titan 3i Group (III ), discounts are the widest across the private equity sector at an average of 40%, where markets struggle to believe the valuations of private assets.

Last week, John Singer, the chair of private equity fund and Citywire Best Board winner 2023 Pantheon International, told Citywire that private equity must do a ‘hell of a lot more’. 

Yet only six trusts have regularly bought back shares this year to date, with Peel Hunt’s corporate client Augmentum Fintech (AUGM ) topping its table buying 4% of its shares in issue in 2023.

Several infrastructure funds have introduced buyback programmes this year as investors turned to high-yielding bonds, leading to wide discounts that have proved hard to narrow despite several selling assets at a premium, publishing strong dividend guidance and growing NAV.

Of the 10 that have been buying back stock, there have been varying levels of progress, Pocock noted, but he concluded that their discount was on average 4% narrower than their respective peer group’s weighted average.

He added that dividends, whether funded from portfolio income or realisations can be seen as another way for a company to allocate available resources to returning capital to shareholders.