Investments  

Trust share buybacks double in Q1

Trust share buybacks double in Q1

A doubling in the amount of shares bought back by trust managers in the first quarter has been pinned on volatile markets and a step up in competition with open-ended funds.

The first three months of this year saw £541m worth of shares bought back, compared with £231m last year and a first-quarter average of £259m over the past four years, according to the Association of Investment Companies.

The substantial market drawdown seen at the start of 2016 saw discounts on most trusts widen, a move that obliged many companies to put their discount control mechanisms to work.

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Closed-ended funds arrived on a level playing field with their open-ended rivals after the RDR banned commission payments to advisers, making investment trusts part of the whole-of-market offering.

The increased buyback volumes that resulted show trusts are keener to look favourable when compared with their open-ended counterparts, some managers have said.

Alex Wright, manager of the Fidelity Special Values trust, said an awareness of the discount post-RDR was the main reason behind the uptake in share buybacks this year.

“I think trusts want to compete more with open-ended funds, and clearly one of the ways of doing that is keeping discounts at a reasonable level.”

The Fidelity trust’s board said it would not allow the vehicle’s discount to slip into double digits during what it considered to be normal market conditions.

Mr Wright said: “A number of investors don’t necessarily know when they’re going to need to sell the shares and like to think that the discount is going to stay in a reasonable range, which I think is a fair assumption. I think that’s why the board has come up with the statement that they want to keep the discount in single digits and will use buybacks for that.

“I don’t think that we’re going to be slavishly caught by volatile markets. But I think generally it is a good thing to have some kind of discount control mechanism in place.”

The trust did buy back shares earlier this year amid the market drawdown, the manager confirmed.

Fidelity investment trust director Alex Denny said: “If you’re in a volatile market, I tend to think that trusts are seen as market amplifiers, so if the market falls the discount widens, a sort of double whammy, and then the board has to act because it’s already told the market that it was going to. You see that kind of activity a lot.”

But not all discount control mechanisms, designed to reassure investors wary of being penalised for selling during a downturn, have been put to use amid recent volatility.

The board of the Asian Total Return trust, managed by Schroders’ Robin Parbrook, was criticised by brokers at Numis earlier this year for not buying back shares in 2015.

The firm said: “We can understand the board’s argument that share buybacks are not the long-term solution to maintaining a tight discount. Nevertheless, it appears to have made little attempt to protect [its] 5 per cent target with negligible buybacks during the year.