Investment trusts buying their own shares

What does this show?

It shows the investment trusts — listed funds — that spent the most money on share buybacks in 2016. If a company board thinks its shares are undervalued, it can buy its own shares and cancel them, boosting their value by reducing the number in issue.

Alliance Trust, the 128-year-old Scottish company, tops the list despite suspending its share buyback programme in June as it completed a strategic review, which led to the appointment of a new management team at the end of last year. It is still trading at a discount of just under 5 per cent, according to the Association of Investment Companies.

Other interesting share buyback programmes include that of peer-to-peer trust P2P Global Investments, which is the first of the peer-to-peer funds to try and control its discount following a period of unpopularity among investors.

Templeton Emerging Markets Investment Trust, which focuses on emerging markets, changed managers in summer 2015 after star manager Mark Mobius stepped down. It has also been trying to rein in a discount, despite new manager Carlos Hardenberg improving the fund’s performance.

Witan is a large multi-strategy fund which traded at a premium for much of 2015 before its share price dropped to a discount again last year after a new share issuance.

Why do investment trusts carry out share buybacks?

Investment trusts have two values ——the value of assets held in the fund, and the price its shares trade at on the stock market. A quirk of investment trusts is that the share price can be above or below the value of net assets in the fund (NAV). If the shares are significantly cheaper than the net asset value, the trust’s board might decide to exercise a share buyback programme in a bid to raise its share price.

One reason to do so is that plans for further fundraising can be scuppered if the share price is too low. New shares are priced according to the value of the fund, but it is highly unlikely that investors would buy them if lower-priced shares could be bought on the market.

Aside from that, managers generally dislike seeing their shares trading at a discount. It doesn’t make a difference to the way they manage the fund, but they know investors hate share price falls — even if the manager is making money by increasing the value of assets in the fund.

Should I want to own shares in a fund doing buybacks?

The argument for doing so would be that, in theory, the share price will rise and shares could be sold on for a higher price in future. Of course, share buybacks are not the only factor that can influence share price movements. Many investors are attracted to trusts trading at wide discounts — for dividend-paying funds, this means a higher yield.

What are the two different colours?

The [darker blue] colour represents any fund investing in equities, while the lighter colour represents companies investing in alternative assets such as property and infrastructure. The majority of share buybacks were made by equity-focused funds as they battled against relative unpopularity compared to those investing in alternatives. Equity investment companies accounted for 22 of the 30 companies buying back their shares. They also spent around 70 per cent of the total amount, according to the broker Canaccord Genuity.

So does that mean alternative asset classes are more popular than equities?

Yes, in the world of listed investment trusts. As well as having to carry out fewer buybacks, alternative vehicles raised more than 80 per cent of the new money raised by listed funds in 2016. Assets such as student accommodation and infrastructure were especially popular.

When share issuances and buybacks are taken together, alternative funds had a net share issuance of £3.3bn while equity funds shrunk by £341m.