When Warren Buffett describes a widely professed investment belief as “economically illiterate”, we should probably take notice.
Referring to share buy-backs by listed companies, the Sage of Omaha said in February in his annual letter to Berkshire Hathaway shareholders: “When you are told that all repurchases are harmful to shareholders … you are listening to either an economic illiterate or a silver-tongued demagogue.”
This column heartily concurs. As with any use of money to buy anything, the price at which the transaction takes place is all-important.
Buffett said: “The math isn’t complicated: when the share count goes down, your interest in [the company that repurchases its shares] goes up. Every small bit helps if repurchases are made at value-accretive prices.” All italics are Buffett’s own.
Now in some cases it’s debatable at what level the price paid to buy back shares becomes “value-accretive” – in other words, when the assets represented by the repurchased shares are worth more than the company paid to buy them back.
But there is not much room for doubt if the company concerned is an investment trust whose shares trade at a discount of 20pc, 30pc or 40pc to the value of its assets.
Here, a share repurchase amounts to investing very cheaply in assets that the trust already knows and likes. Very wide discounts are prevalent among trusts that hold “private equity” assets – shares in unlisted businesses.
Yet these trusts have shown a remarkable reluctance to buy back their own shares.
This is despite the fact that, in the words of one broker, such repurchases at steep discounts provide shareholders with “an immediate and risk-free return” by enhancing net asset value (NAV) per share.
Now, though, one of these trusts has broken ranks.
Pantheon International, first tipped here in 2018, has announced a large and flexible programme of share buy-backs at the initiative of its chairman, John Singer. He has said he does not believe that private equity trusts have “kept up with the changing needs of stakeholders”.
He said one of his first acts as chairman had been to establish a review of the trust’s capital allocation decisions.
