the department for trade and industry releases final draft regulations to put to parliament
Investment trusts are to be allowed to hold their own shares in treasury under company regulations set to go before Parliament in the spring.
The Department for Trade and Industry has released final draft regulations allowing investment companies, subject to shareholder approval, to hold onto shares they have bought back and sell them back into the market at a later date.
Currently, investment companies buying back their shares must cancel the stock. Previous drafts of the regulations prohibited investment companies from holding treasury shares but this has been removed from the final draft after lobbying from the industry.
AITC director general Daniel Godfrey said the change in regulations will allow investment trusts greater flexibility in managing discounts. 'Treasury shares will be a vital tool for boards allowing them to ensure the liquidity of their shares. Improved liquidity will make the shares more attractive and thus improve demand,' he said. 'This should lead to higher prices and lower discount volatility over time. It is an important achievement for the industry and will result in enhanced value for investment trust shareholders.'
Iimia head of investment trusts Nick Greenwood, said the regulations will give trust boards the power to reduce discount volatility.
'The ability to buy and issue from treasury is a sophisticated tool relative to the blunt instrument of buying back for cancellation. In the majority of cases, wide discounts reflect the fact that a trust or sector is out of favour. In this circumstance surplus stock can be taken off the market and fed back when sentiment improves,' he said. However, Greenwood said the current wide discounts among generalists and UK Small Cap trusts reflect structural oversupply rather than a temporary dip in sentiment, suggesting they will continue to shrink as shares are cancelled.
Perpetual Income and Growth trust manager Mark Barnett said similar claims were made back when investment trusts were first given the ability to conduct buybacks for cancellation.
'It won't necessarily affect how I run my investment trusts. There are plenty of attractive areas of investment without having to do that,' he said.
'Performance is the most important determinant of the level of discount or premium to NAV. You build up a track record and a following in the market and people either like or dislike what you're doing. That's how you build up confidence.'
The DTI said it intends for the regulations to come into force later in the year, on the same day Finance Bill legislation making consequential changes to tax law, comes into force.
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