The investment trusts that are buying back shares

Buybacks are one of the key tools investment trusts have at their disposal to try to reduce their discount to net asset value (NAV). Given the persistence of those discounts in 2023, it's no surprise that buyback activity has been pronounced this year. In the first nine months of 2023, investment trusts bought back £2.8bn-worth of shares, a 34 per cent increase on the same period last year, according to Morningstar and Winterflood data. 

Buyback programmes alone are unlikely to succeed in closing big discounts, especially in a tough environment like the one in which trusts currently find themselves. But the argument in favour of the strategy asserts that they demonstrate a board’s focus on shareholder returns and its confidence in the portfolio, as well as helping reduce discount volatility and clean up the shareholder register by offering an exit to those who want to sell.

Equity trusts

For trusts investing in liquid assets, buying back shares is a fairly easy process. In the first nine months of the year, the Association of Investment Companies (AIC) sector that bought back the highest amount was the global sector (with £552mn-worth of buybacks) and the trust that bought back the most was Worldwide Healthcare (WWH) with £177mn.

These figures above must be considered in light of the size of each trust and sector. Scottish Mortgage (SMT) makes the list with £82mn-worth of shares bought back, but this only accounts for about 0.9 per cent of its current market cap. The trust topped the share buyback chart in 2022 with £231mn, and has a chunky portion of illiquid holdings to contend with (30 per cent of assets at 30 September). 

Trusts with significant programmes in relation to their size include Troy Income & Growth (TIGT) and Mid Wynd International (MWY), although both are now reaching their limits. TIGT is committed to buying back shares by its discount control mechanism, but this was suspended earlier this month because the trust was close to depleting its reserves. It is currently exploring the option of merging with another trust. Similarly, Capital Gearing (CGT) has a zero discount policy but has had to slow down its buyback programme as it seeks court approval on what reserves it can use to fund it. 

Brunner (BUT) is one of the few trusts in the global sector with no buybacks to its name so far this year. At 15.5 per cent on 3 November, its discount is one of the highest in the sector despite a comparatively decent performance over the past 12 months. Trusts with more than £500mn in assets that have not bought back shares this year despite trading at double-digit discounts include Henderson Smaller Companies (HSL), Baillie Gifford US Growth (USA) and Fidelity Emerging Markets (FEML). Tom Burnet, chair of Baillie Gifford US Growth, said in the trust’s latest annual report that buying back £3.6mn-worth of shares in May 2022 had a “limited impact” on the discount, so the board decided to prioritise investing in new opportunities instead.

Alternatives

Buying back shares is more difficult for alternative trusts. Their underlying assets are illiquid, so raising money is a more complicated process; and there are often conflicting capital priorities. They may have debt to pay back or investment commitments from which they cannot easily pull back, for example.

James Carthew, head of investment company research at QuotedData, cautions against buybacks at all costs in the alternatives space. They can make sense when asset sales are already planned or when the cash flows allow it, but trusts should avoid doing “fire sales” just to fund buybacks, he argues.

So it may not be a surprise to see that buyback activity among alternative trusts has been spotty. Infrastructure giants such as HICL Infrastructure (HICL), International Public Partnerships (INPP) and The Renewables Infrastructure Group (TRIG) have not bought any; Greencoat UK Wind (UKW) has recently announced a £100mn programme; Pantheon International (PIN) earned praise for its commitment to return £200mn to shareholders by May 2024, but this was chiefly via a reverse auction tender offer. 

Nick Greenwood, manager of MIGO Opportunities (MIGO), notes that the prevailing business model for many infrastructure and renewables trusts was previously to issue shares and use the capital to fund new projects. But issuing shares is much less likely to find favour with investors when they are trading at a discount, so they face some tough capital allocation decisions. Stifel analysts have suggested that UKW should have prioritised paying back debt over buybacks, for example.

Sequoia Economic Infrastructure (SEQI) tops the buyback chart in the alternative space for the first nine months of the year. Comparatively small alternative trusts that have bought back significant portions of their assets include Augmentum Fintech (AUGM) and Fair Oaks Income (FAIR).