Troy Income & Growth (TIGT ), one of the more highly-rated UK equity income funds, has suspended share buybacks ahead of a possible merger with another investment trust.

The £164m closed-end fund, which is chaired by Bridget Guerin and managed by Blake Hutchins and Hugo Ure at Troy Asset Management, informed the market yesterday afternoon that it was ‘very close’ to fully utilising its annual buyback authority and depleting the distributable reserves which fund the share buybacks under its discount control mechanism (DCM).

‘In addition, the board is currently exploring possible options for a combination with another investment trust which would be effected by a scheme of reconstruction.

‘Therefore, in the light of the above matters the company is suspending the DCM and the buyback of its shares with effect from close of business today,’ Guerin stated.

She promised to announce further details of the proposed merger and an update on discount controls  by the end of this month. 

Shares in the trust, which have traded sideways in the past year and stand on a 4% discount below net asset value, dipped 1.4% to 65p in early trading.

Shares in other UK equity income trusts were steady this morning but two of the sector’s smallest funds trading on double-digit discounts rose as the market speculated on what could be the target.

BlackRock Income & Growth (BRIG ), a £34m sub-scale fund, gained 2.25% to 182p, while the £6m Investment Company (INV ) advanced 2.5% to 290p. The £198m Schroder Income Growth (SCF ) looks an unlikely prospect but added 1.5% to 271p £198m on a 6% discount.

TIGT is the second trust this week to reveal funds for buybacks are diminishing. Capital Gearing (CGT ) on Tuesday announced that its buyback activity would sharply reduce in the next three months as it waits for courts in Northern Ireland to reclassify its share premium account as distributable reserves.

Winterflood Securities commented: ‘Troy Income & Growth has delivered positive yet comparatively underwhelming performance, while offering below average size and a relatively low yield. Therefore, we view the exploration of strategic options as sensible.

‘We continue to be encouraged by the pace of consolidation in the sector, improving scale and liquidity,’ they added.

Peel Hunt analyst Thomas Pocock said the sudden suspension of buybacks could result in a short-term derating and widening in the discount and that ’shareholders will likely have expected better planning and communication’.

He estimated TIGT had bought back £30m of shares this year, shrinking in size by 16%, in an effort to keep its stock trading close to NAV as investor demand weakened in the risk-averse market and income investors turned to gilts and cash offering higher yields than its 3%.