Investment companies can obtain permission from their shareholders to buy back up to 15% of their shares at a time. These shares can be cancelled or can be held in treasury to be reissued at a later date. This is a useful tool to help manage the supply of shares.
This works well for companies investing in liquid assets such as shares and securities - and many investment companies have permission to use share buy-backs and use them proactively.
Investment companies can also take more radical action if necessary to control supply.
They can, subject to shareholder permission, do a tender offer, that is an offer to purchase some or all of the shares in issue for all shareholders on the same terms.
They can also liquidate and return money to shareholders if the shareholders not want an investment company to continue to exist.
Existing investment companies can also issue shares if there is demand. Indeed some of the most popular investment companies are currently regularly issuing new shares, particularly in some of the income-focused sectors, which are currently very much in demand.
Last year an impressive £2.7bn of investment company shares were issued from existing companies into the secondary market, indicating the strong demand for some companies.
‘The discount’
Due to investment companies being companies in their own right, listed on a stock exchange, a company can trade on a discount or a premium. So what is ‘the discount’?
The stock exchange listing means that the investment company itself is affected by the laws of supply and demand just like any other share, as well as the performance of the underlying funds in which it invests.
It is very easy to gauge market sentiment towards an investment company by looking at the discount/premium.
These are published daily, but the figure is arrived at by adding up the value of the underlying assets - less debt and other prior charges - and dividing this by the number of shares in issue.
This gives the net asset value per share. If the share price is lower than the Nav per share, the investment company is said to be trading at a discount. If the share price is higher than the net asset value per share, it is said to be trading at a premium.
So if the Nav per share is 100p but the share price is 90p, the investment company is said to be trading at a 10 per cent discount. But if the NAV per share is trading at 100p but the share price is 110p, it is said to be trading at a 10 per cent premium.
