10th October 2025
As long-term investors in the investment trust sector, we are constantly weighing up the benefits of a short term boost to performance that corporate activity (M&A and share buyback programmes among other measures) provides and the desire for the sector to thrive long into the future so it can continue to be an ongoing source of alpha generation for our funds and clients. This will sound familiar to UK small cap managers too at the moment. Regular readers will know our strong view that there is no better risk adjusted investment for trusts languishing on wide discounts than to buy back their own shares. No wonder then that share buybacks in the investment trust sector, and UK market more broadly, are at record levels. There are countless results presentations we’ve seen recently where share buybacks are a positive contributor in the NAV bridge.
It is surprising how many times we still hear the phrase “but buybacks don’t narrow discounts”. To us there are two answers here. First, buybacks have to be viewed primarily as a capital allocation decision. If this sensible capital allocation decision also helps narrow the discount by reducing the supply of shares, then that’s a bonus. Second, it depends on whether it is a conventional liquid investment trust or an alternative asset trust, as that will dictate the scale and frequency of a buyback programme. We believe relentless and significant buybacks to reduce excess supply can make a difference to the discount.
Conventional trusts have a relevancy problem when compared to similar open-ended funds or active ETFs. The late Robin Angus, founder, manager and director of Personal Assets Investment Trust, and one of the first to adopt a zero discount policy, once said “a discount is a choice”, and that is true for conventional trusts with liquid underlying portfolios (whose assets can be easily sold at prevailing market prices with the proceeds used for buybacks). Boards and managers should be prepared to shrink first (with the aim of growing later) through regular and material share buybacks. Share buybacks are not the only tool in the box and we’ve seen a few contingent and non-contingent tenders introduced by a number of conventionals lately, as well as periodic realisation opportunities. We like to refer anyone who is unsure as to the merits of realisation events as a mechanism to grow to TwentyFour Income (TFIF) which has had a 100% no strings, realisation opportunity every three years since its launch in 2013 when it listed with £150m of equity. Today it is £850m because it has delivered on its objective, offers something different to what is available in open-ended form and has been able to issue more shares than it cancels at each realisation event due to its premium rating, which itself is as a result of the excellent and differentiated performance. Yes, there have been others that haven’t succeeded in growing after some shrinkage, but that’s because the demand hasn’t been there and they should therefore be wound up if they remain sub-scale.
So back to investment trusts holding alternative assets and capital allocation being the main motivation for share buybacks. A theme we have picked up in recent meetings and presentations is the need for boards and managers to balance the various views of a disparate set of shareholders when it comes to their capital allocation decisions. We hear that some shareholders see no other viable option for spare cash than to aggressively buy back shares until the discount has narrowed (“eat themselves” as one manager put it) while at the other extreme some shareholders don’t want to see the size of a trust shrink and want cash to be deployed into new opportunities in order to help to maintain a liquid investable universe for their own mandate. Ultimately a Board’s capital allocation decision has to be first and foremost about what will generate the best risk-adjusted returns for shareholders based on the information present to them at the time of the decision. Boards also need to be mindful of any gearing being deployed: all else equal, a buyback increases gearing. Overall, we recognise the need for alternative or private assets trusts to also continue investing in the portfolio to protect the future NAV and dividend. For some private assets, the NAVs are dependent on the trusts being able to follow their money. For infrastructure trusts with wasting assets, new investments are needed to refresh the portfolio. In these instances a buyback may be less accretive than it looks. Ideally, in our view, a balance of share buybacks and new investments that beat the buyback IRR hurdle should keep most shareholders happy.
However, we do not apply a ‘one-size-fits-all’ policy to all trusts. Whilst we are always sceptical when we hear managers ignoring share buybacks at wide discounts in favour of new investments, we are also prepared to give the benefit of doubt to management in certain instances and trust that their growth strategy will trump the returns from share buybacks. We are fully aware that we are not experts in all asset classes, but we know enough to notice when there is a genuine opportunity and when a manager is simply trying to protect the size of their mandate and their fees, often using the “both other shareholders disagree with you” argument as an excuse. Tritax Big Box (BBOX) and Primary Health Properties (PHP) are two examples where we trust the management to invest in their growth strategies even though their shares are trading on historically wide discounts. PHP has used cash, shares and debt, to acquire its only listed peer, Assura, a deal that we believe will drive long term earnings growth, NAV growth and dividend growth. BBOX is selling mature assets to reinvest in development pipelines including data centres where they have a clear competitive advantage in the race for land and power. International Public Partnership Ltd (INPP) is one that is conducting the perfect balancing act of investing in the portfolio with its Sizewell investment to grow the NAV and future dividend. Crucially, as we wrote in a recent Crescendo, we highlighted the quality of INPP’s disclosure around the buyback hurdle and that the Sizewell investment didn’t stop the existing share buyback programme.
Ultimately, we believe shareholders across the investment trust sector must engage with boards and managers and press them hard on buybacks being first and foremost part of an effective capital allocation policy. Conventional trusts need to remain relevant and proactively ward off the unwanted advances of activist shareholders, with aggressive share buybacks and other measures adopted to narrow the discount. Alternative trusts must demonstrate best in class governance and allocation policies, balancing the need to deliver short term and long term value for shareholders. At a time where there is apparent strong demand for competing vehicles like LTAFs, the trust sector needs to reduce the supply of shares, grow NAVs and unearth new demand for its shares. Simply marketing to those potential buyers of LTAFs pointing out some of the superior features of the investment trust structure would be a good place to start.
Daniel Lockyer – Senior Fund Manager
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