Buybacks reach a low
Last month saw the smallest amount of shares repurchased by trusts since the abolition of ACT in Apr...
Last month saw the smallest amount of shares repurchased by trusts since the abolition of ACT in April 1999.
During April, £41.3m worth of stock was bought-in, compared to £228.3m in March and £341.3m in February. This makes a total so far this year of £833.3m while £1.2bn worth of shares were repurchased in the whole of 1999. Only 26 trusts out of the 126 in the FTSE Investment Companies index bought in shares for cancellation last month. Out of those, 13 bought in more than £1m worth. Much of the activity was dominated by the generalist trusts, with the most active trusts in buybacks being Monks, Scottish Investment and Murray International.
Deutsche Bank believes the abolition of ACT and the ability of trusts to buy in shares during closed periods have presented trusts with an opportunity to mop up excess stocks in order to enhance NAV for remaining shareholders and potentially narrow discounts. One of reasons for the relatively small amount of share buyback activity in April is the insufficient evidence that buybacks are effective in narrowing discounts. Martin Fothergill, investment trust analyst at Deutsche, said: "This is true when you look at the sector as a whole, but with so few trusts actively participating, it becomes rather self perpetuating. Share repurchases can work on a trust by trust basis if conditions are right and the buy in is correctly managed."
In February Monks repurchased more than two million shares and saw its discount narrow from 19.3% to 17.4%. Yet in April when the trust repurchased £7m worth of shares it saw its discount widen by 0.7%. The hit and miss nature of buyback strategies reflects the underlying need for sentiment towards a trust or sector to be right for a buyback to work. Only three sub sectors have seen their discounts narrow over the period April 1999 to April 2000. One of these sectors has been Sector Specialists which includes Henderson Technology and Finsbury Technology. During 1999 and 2000 £35.7m worth shares were repurchased by trusts in the sector, with discounts narrowing from 14.4% to 11.1%. While in the international generalist sector £1.2bn worth of shares were bought back over the same period and the discount widened from 14.8% to 16.6%.
One reason why there has been a narrowing of the Sector Specialists discount is that until the last two months market sentiment has been positive towards technology. Discounts have widened among international generalists as a result of many institutions selling their holdings in the trusts as they now have their own asset allocation capabilities and no longer require generalist investment trusts.
The other two sectors which have seen their discounts narrowing between April 1999 and April 2000 are Europe and international smaller companies. In April 1999 the discount on the Europe sector was 11.9%, now it is 9.8%. The narrowing can be partly explained by the positive sentiment towards Europe which was seen in the second half of last year. In December 1999 the discount on the sector stood at 4.3%.
The narrowing of the discount on international smaller companies is much harder to explain. It has come in from 15.2% in April 1999 to 12.7% in April 2000. Alan Ray, investment trust analyst at Credit Lyonnais, said that the sector was so diversified that no real conclusions could be made.
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