Governance and Corporate Actions · Investment Trusts
Repurchasing shares below NAV can increase NAV per remaining share, while issuing shares can raise new capital. Neither action should be assessed without its price, costs and effect on the portfolio.
Work through a repurchase
A simple company has £100 million net assets and 50 million shares, giving 200p NAV. It buys and cancels five million shares at 160p, spending £8 million. Net assets become £92 million and shares become 45 million. NAV per remaining share becomes about 204.44p before transaction costs.
This arithmetic is accretive because the company paid less than NAV for the shares. It does not prove the portfolio improved or that the market discount must narrow. Remaining shareholders still bear investment and market risks.
Examine the tradeoffs
Repurchases use cash and reduce company size. Fixed expenses may then be spread over fewer assets. Selling investments to finance them can create costs, while keeping debt unchanged can increase gearing relative to net assets.
Ask whether the policy is compatible with commitments and liquidity. The theoretical NAV benefit should be weighed against those effects rather than treated as a free return.
Apply the same discipline to issuance
Issuing ordinary shares above NAV after costs can increase NAV per existing share. Issuing below NAV can dilute it unless the structure or other protections change the outcome. Relevant authorities and transaction terms matter.
A new share issue may make sense to fund opportunities or improve scale, but the price, expenses and deployment plan determine its economics. Read the announcement and consider both existing and incoming investors.
Try it yourself
A company has £60 million NAV and 30 million shares. It cancels three million shares bought for £5.4 million. What is the new NAV per share before costs?
Show the worked answer
£54.6 million divided by 27 million shares is about £2.0222, compared with £2 before the repurchase.
Further reading
Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. This guide focuses on listed investment companies commonly called investment trusts in the UK. Product terms, access and tax treatment vary by jurisdiction.
