Faith Glasgow runs through analysis that highlights the investment trusts that have bought back the most shares relative to their size in an attempt to control their discounts.
The geopolitical and economic volatility of most of 2022 was a tough ride for most equity-focused investment trusts. Average discounts across the sector widened dramatically, from around 2% at the start of the year to 16% by the middle of October.
Therefore, it was unsurprising that many investment trust boards decided to make use of their share buyback programmes to try and keep discounts under control. However, as separately explained in our guide to share buybacks, the tactic is not a panacea for containing discounts.
A new note on the subject from broker Peel Hunt estimates that around £3.5 billion has been spent on buying back shares from the beginning of 2022 to mid-March 2023. To put that into some kind of context, the broker calculates that buybacks worth around £1.8 billion took place in 2021.
So, which trusts have been parting with the largest amounts relative to their size during this recent spending spree?
The below table shows the top 10 in terms of the percentage of issued share capital that has been repurchased over the period.
Top 10 buyback programmes
|Investment Trust||Total buybacks (% of Issued Share Capital)||Total buybacks (£ million)|
|Troy Income & Growth (LSE:TIGT)||17||39|
|Momentum Multi-Asset Value (LSE:MAVT)||14||39|
|Martin Currie Global Portfolio (LSE:MNP)||14||8|
|MIGO Opportunities (LSE:MIGO)||12||11|
|Riverstone Energy (LSE:RSE)||10||36|
|Strategic Equity Capital (LSE:SEC)||10||18|
|Invesco Select Trust||9||12|
|Third Point Investors (LSE:TPOU)||9||52|
|Rights & Issues (LSE:RIII)||9||14|
Source: Peel Hunt estimates. Company data, Morningstar.
Peel Hunt makes the point that it’s the boards implementing zero-discount policies (ZDPs), and those operating strict discount policies that commit to rigorous controls to keep the discount within tight limits, that have tended to lead the pack.
Troy Income & Growth (LSE:TIGT) tops the table, having bought back £39 million of shares amounting to 17% of issued share capital (ISC). It’s followed by Momentum Multi-Asset Value Trust (LSE:MAVT) and Martin Currie Global Portfolio (LSE:MNP), both of which have repurchased 14% of ISC. All three boards operate ZDPs.
At number four in the table is MIGO Opportunities Trust (LSE:MIGO), which doesn’t have an explicit discount defence level. However, notes Peel Hunt: “We estimate that buybacks typically occur once the discount widens past 2%.”
Not all investment trusts are equally well placed to take advantage of a buyback strategy: size can have an impact on its ability to buy back shares, the broker suggests. Basically, the larger the trust, the greater its scope to conduct buybacks; some of the smallest trusts are likely to find that it’s just not economical to reduce their capital in this way.
“We find that trusts with a market cap of over £1 billion have bought back a weighted average of 1.8% of ISC, versus 1.4% of ISC for trusts below £1 billion,” the analysts observe.
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Although a trust’s buyback activity is typically measured in terms of the percentage of share capital repurchased, it’s also interesting to cut the cake in a different way, by looking at the amount of cash spent on buying back shares.
On this measure, huge retail-focused trusts in the global and UK sectors top the table. Scottish Mortgage (LSE:SMT), Monks (LSE:MNKS), Alliance Trust (LSE:ATST), F&C (LSE:FCIT), Witan (LSE:WTAN) and Finsbury Growth & Income (LSE:FGT) are all in there, all having spent more than £100 million on buybacks since the start of 2022.
However, their size means that these large sums still amount to under 10% of the total value of shares in issuance. Topping the table, Scottish Mortgage has bought almost £300 million of shares over the period – but that amounts to just 3% of its ISC.
There is also considerable variation in the number of times trust boards have carried out buybacks. For example, Witan has implemented more than 300, while MIGO Opportunities has done just 20.
Which strategy works best to control the discount?
Although it can be difficult to compare one trust with another because they don’t necessarily have the same discount goals, Peel Hunt suggests that having a more effective buyback scheme is likely to reduce the extent of swings in a trust’s discount.
It has therefore looked at discount volatility as a measurable proxy for efficiency. It finds that lower volatility aligns with both a higher percentage of shares bought back and more frequent buybacks. There is less correlation with the amount spent on share repurchasing.
Peel Hunt also takes the opportunity to consider whether there are any “asymmetric re-rating opportunities” – situations where a buyback is likely to be triggered by a trust’s current discount.
It picks out Monks, which is currently on an 11.5% discount: larger than the widest discount defended by the board to date. “We estimate that Monks buybacks have typically occurred in the range of a discount of 1-11%,” the team adds.
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