Investment trusts boost flagging shares with record-breaking buybacks

The buybacks of investment trusts will likely reach a new record this year as London-listed funds continue to trade at a discount to their true value.

Winterflood’s analysis shows that investment companies spent £2.2bn on buybacks during the first four month of this year. This is more than 106% higher than the amount at the same time in 2023.

Last month, 118 investment trusts bought back shares. This is the highest number since Winterflood began keeping records in 1996.

Scottish Mortgage, Britain’s most-popular investment trust, purchased shares in April worth over £75 million as part of an ambitious two-year plan. The goal is to purchase at least £1 Billion of its stock. It bought back over £300 million last week in one day.

Including Scottish Mortgage, the trust buybacks in the first quarter of this year were more than 90% higher than the same period the previous year. Investment companies bought £3.6 billion worth of shares in 2023, a record buyback year.

Investment trusts, who make up over a third in the FTSE 250, are increasingly reliant upon buybacks to support their share price, which lags behind their net asset value. The average discount for the sector is 7.7 percent.

Baroness Altmann stated that the Financial Conduct Authority had misinterpreted EU-era regulations in a manner that disadvantaged British businesses relative to their international competitors.

Theoretically, buybacks help to reduce the discount by reducing the amount of shares available on the market. According to market watchers, the old rules that artificially inflate their costs are part of what has caused investment trusts’ demand to decline.

As a result of remnants of EU law, investment companies are required to add their corporate expenses on top of the management fees they charge in their “ongoing fee” report as if these costs were paid by the shareholder. Critics say this amounts to double counting.

Ben Conway of Hawksmoor Investment Management said: “Investment Trusts are forced to disclose costs as if open-ended funds because of EU retained law. It is not right for investment trusts, as their costs are reflected by their share price.

Conway stated that higher reported fees are driving away cost-conscious investors from the sector. Conway said: “This clearly impacts the share prices and leads to huge discounts.”

The Financial Conduct Authority, the City regulator has reportedly reviewed the EU-era regulations but insists that it cannot act without legislative changes.

The regulator released a statement in November that allowed investment companies to provide more information about their costs. In the first half, it is expected to consult about a new disclosure scheme.

Baroness Altmann who has been advocating legislative action in the House of Lords, stated that the FCA misinterpreted rules in a manner which disadvantaged British businesses relative to their international competitors.

She said: “These are EU regulations, yet no country in the EU applies them the same way as we do.” “The government says it wants to fix the problem, but investors are selling because they find the pain of holding too much.”

A spokesperson for the FCA stated: “We recognize the challenges investment companies face under the current disclosure regime. We acted in order to allow firms more flexibility when it comes to explaining their charges and costs.

However, the government must change its legislation in order to allow us to move forward. We are looking forward to the parliament and the government giving us the power to reform retail disclosure.

A government spokesperson said: “We acknowledge the industry’s concerns, and we are working with FCA at pace to repeal and replace EU retail disclosure rules inherited from Europe, including those for investment trusts. In due course, we’ll provide more details about these reforms.

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