The greatest media opportunity of all?

For 13 years Henderson Smaller Companies has almost continually traded at a discount – where the share price is lower than the value of the assets in the portfolio. And so has much of the rest of the UK smaller companies sector, for most of that time. This year, the Board decided to take action and has so far bought £750,000 of its own shares. The discount now (May 2024) stands at around 14% compared with a sector average of 11%.

When you look more widely, investment trusts purchasing their own shares has become something of a recent trend. In fact, in 2023 Boards spent £4bn eating their own lunch by buying in shares.

The logic for doing so is much debated. There are arguments on both sides, and some in the middle! The most basic school of thought is that buying in shares reduces supply for a given amount of demand, and therefore share prices should gravitate upwards.

Those that have analysed these things say it makes no difference in the long term. Discounts have generally stayed wide, despite the billions being poured in. This is, they say, because share purchases only work whilst they are taking place.

Others say investors should ‘discount the discount’ as your buy discount and your sell premium are a small part of your overall investment returns.

There’s also the contention that buying one’s own shares is an investment decision - some boards encourage buy-backs if the Fund Manager is negative on the market and is holding cash with nothing else they want to buy.

But there is an argument that says that rather than buying-in shares, companies could make a different investment decision: an investment in demand generation.

£4bn would buy quite a lot of demand generation. Imagine you were able invest all that money in paid search through Google, for example. At 25p/click that’s 16 billion visits to investment trust websites – or 44m visits for each member company of the AIC!

If you shared out the £4bn amongst the 359 trusts – that’s a budget of £11.1m each. That would buy you 218 first full page colour ads in the Telegraph per trust!

Alternatively, you could record 557 fund manager videos for each trust and pay to promote them widely to any audience you choose.

Ok, that’s all fanciful stuff. Spending money on marketing doesn’t guarantee a narrower discount. Not everyone who sees your ad or video will buy shares, but there’s a better chance of them doing so if they’ve heard about your proposition and understood what it does. It’s also true to say that spending money on buying your own shares does guarantee a result either.

But the fanciful stuff does make a point. Reducing supply is one possible way to ‘deal with a discount’; but investing in creating demand is another that is always worth consideration.