Why do ITs buy their own shares?

aroominyork

Why do investment trusts buy their own shares? Is it to support the price? TEM, which is trading around a 12% discount, is currently regularly buying them and saying they will only be sold into the market when at a premium to the NAV.

ColdIron

Usually to control or reign in discount. Some companies pursue this actively, some don't

Glen_Clark

Some IT shares sell for less than the price of the assets they holod because their management is perceived to be a liability.
In an attempt to reduce this embarrasement, the funds purchase some of their own shares. Unfortunately they don't purchase them all and wind the trust up to the benefit of shareholders. They keep the party going to the benefit of management.

aroominyork

Re TEM, that seems a bit harsh, Glen. While they might be buying to support the price, this is generally considered a good IT which has no need to be wound up.

ColdIron

Share buybacks have the effect of increasing the share price and narrowing the discount as there are less available which is usually good for shareholders especially so if you are about to sell. The company could choose to hold them as an additional shareholder and manage their sale later or simply cancel them. Companies, especially smaller ones, can be reluctant to repurchase their shares as it can reduce it's absolute size and their fees may be linked to this. On balance I don't think it's a bad thing and not something to fear but I'm no expert on this

This might be of interest with respect to TEM, it's the FT so may not work
https://www.ft.com/content/64a32088-e0bd-11e6-9645-c9357a75844a

george4064

ColdIron wrote: »

Usually to control or reign in discount. Some companies pursue this actively, some don't

Just to add some further information, some ITs appear to trade a large discount/premium to NAV. This sometimes happens to ITs that hold unlisted investments which are naturally hard to value as they are not publicly traded.

An example of this is the Lindsell Train Investment Trust plc who's largest holding (by a country mile) is Lindsell Train Ltd, which is not publicly traded. This large holding in a unquoted investment is a major factor in its large difference between is share price and NAV.

Similar scenario happens with a lot of Private Equity ITs too.

grey_gym_sock

buying back shares at a discount (or issuing shares at a premium) does have the advantage of increasing the net asset value (NAV) of the remaining shares.

e.g. suppose the NAV is 100p per share, but the they can buy back some shares for only 95p. that leaves the trust with 5p of what you could call "free money" for each share they buy back.

suppose they buy back 1% of the outstanding shares, for 95p per share. then that "free money" will be about 0.05p per remaining share. which will increase the NAV to about 100.05p.

and there is a similar effect on the NAV if the trust can (at some other time) issue new shares at a premium to NAV.

so if a trust can do it both ways, it is profitable for long-term holders, even if they don't care about fluctuation in the discount.

OTOH, if a trust is always at a discount, and just keeps buying back more shares over time, then its running costs per share will tend to rise.

aroominyork

Greygym, I do not see how an IT buying back shares affects the NAV. The NAV relates to the underlying companies' shares held by the IT so what difference does it make to the value of those shares whether, once bought by the IT, they are held by me in my portfolio or by the IT in their treasury?

aroominyork

ColdIron wrote: »

This might be of interest with respect to TEM, it's the FT so may not work
https://www.ft.com/content/64a32088-e0bd-11e6-9645-c9357a75844a

Nope, can't access it. Any chance you could please tell me the gist?

ColdIron

Typically I can't access it either now but the gist was that it's an active planned policy pursued by the new manager since Mark Mobius stood down in 2015 so not a cause for concern

Glen_Clark

aroominyork wrote: »

Re TEM, that seems a bit harsh, Glen. While they might be buying to support the price, this is generally considered a good IT which has no need to be wound up.

Considered good by its management and hangers on.
If they were good there would be a premium instead of a discount.
Winding it up would enable shareholders to realse the full value of the assets.
But leave its management out of a cushy job.
So they prefer to circumvent their legal obligation to act in the interest of their shareholders.
And act in their own interest instead.