Buybacks hit record high as trusts aim to tackle ballooning discounts

Around a third of investment trusts bought back their own shares last month, representing the highest-ever monthly figure.

Data from Winterflood, the broker, shows that 118 investment trusts repurchased shares, the highest number since records began in 1996. In total, the Association of Investment Companies (AIC) represents 350 investment trusts.

Overall, £620 million of buybacks were made in April, slightly down by -2% compared to a month earlier, but up 152% versus April 2023. Year-to-date, buybacks have totalled £2.2 billion, up 106% from the first four months of 2023.

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The rise in share buybacks reflects investment trust boards becoming more proactive in tackling wide discounts. The average discount for the closed-ended fund universe is -14.2%. Winterflood says that over the past 10 years the sector average rating has ranged between a 0.7% premium and a -21.4% discount, while averaging a discount of -6.0%.

Share buybacks are a tool that boards can use to try to contain or reduce discounts. By reducing the number of shares in circulation, there’s less of an imbalance between supply and demand. In theory, this will reduce the trust’s discount, benefiting shareholders as the share price receives a boost as it narrows towards the value of the trust’s underlying investments.

For investment trusts with a discount control mechanism – a rule to stop a discount going over a certain percentage – share buybacks are often used. Some investment trusts, such as Capital Gearing (LSE:CGT), have a “zero discount” policy with the aim of keeping the share price trading close to the value of the underlying investments (the net asset value or NAV) at all times.  

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The top three trusts most actively buying back shares this year are Scottish Mortgage (LSE:SMT), Finsbury Growth & Income (LSE:FGT) and Smithson Investment Trust (LSE:SSON), which have bought back £212 million, £123 million and £112 million. In in mid-March, Scottish Mortgage announced a plan to make at least £1 billion available to buy back its own shares over the next two years.

Capital Gearing and Personal Assets (LSE:PNL), which both have zero discount policies, were fourth and fifth in the share buyback rankings.

While buying back shares is a sign of confidence from a board that is viewing the discount the trust is trading on as being unjust and too cheap, it is no panacea. Buybacks won’t prevent discounts widening if there is no demand for the shares.

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Much more important over the long term is the performance of the underlying investments held by the investment trust. This has the biggest influence on the overall total shareholder returns. Put simply, if the trust doesn’t perform well, it is likely to consistently have a high discount due to a lack of demand for its shares. For investment trusts that aren’t attracting investors but are carrying out share buybacks this leads to assets shrinking and less liquidity for the shares in the future.  

Overall, Winterflood’s data shows equity-focused investment trusts have led the way in terms of the amount of share buybacks year-to-date. Those that have been most proactive include Monks (LSE:MNKS), Worldwide Healthcare (LSE:WWH) and F&C Investment Trust (LSE:FCIT).

Some trusts that haven’t bought back shares for several years have recently changed their stance, including Henderson Smaller Companies (LSE:HSL) and Schroder Income Growth (LSE:SCF). According to financial publisher Citywire, this is the first time the duo have bought back shares in 13 years and 16 years respectively.