Capital Gearing Trust

[Lootman]

Ok, not a fools errand if you are the management of the company and your bonus is based on Earning Per Share growth. Of course, I understand the theory as they will always have issued shares at or above NAV and buy them back below NAV, but at the end of the day this is not the business of the company. If they have genuinely spare cash then it should be returned to shareholders via other means. To massively dilute and then buy back in this way is not the best use of funds IMO, and very few companies make buybacks work in the long run. I can't think of many where it has, can you? Only people profiting from this endeavour is the company's brokers.

I am not going to get too involved in this because some ITs (such as PNL) have always made this a policy with no harm to them and there arguments to be made for both a strict DCM and none at all. On balance I think a DCM is a good thing.

A DCM makes more sense for an IT that claims to be a wealth preserver, since part of that idea is not having to worry about going to a discount just when you want to cash out. (Not that CGT has preserved wealth that well recently anyway).

For (say) a growth IT that matters less and I might welcome the opportunities that come with fluctuating discounts and premia.

More generally I like buybacks as they do not create a tax event. But not if a company has to borrow to fund them. Apple's $20 billion a quarter from cashflow is very welcome, for instance, and preferable to dividends with 15% withholdng.

[simoan]

A DCM makes more sense for an IT that claims to be a wealth preserver, since part of that idea is not having to worry about going to a discount just when you want to cash out. (Not that CGT has preserved wealth that well recently anyway).

This is the problem though i.e. all the buyback does is to provide liquidity for sellers. Why should the company use other shareholders money for that purpose? Ultimately, share prices are determined by supply and demand, and it turns out that CGT oversupplied the market by increasing its share count fivefold in as many years. That costs money, as does buying them all back again. Neither is a a good use of shareholders funds or management time IMHO.

[Dod101]

A DCM makes more sense for an IT that claims to be a wealth preserver, since part of that idea is not having to worry about going to a discount just when you want to cash out. (Not that CGT has preserved wealth that well recently anyway).

This is the problem though i.e. all the buyback does is to provide liquidity for sellers. Why should the company use other shareholders money for that purpose? Ultimately, share prices are determined by supply and demand, and it turns out that CGT oversupplied the market by increasing its share count fivefold in as many years. That costs money, as does buying them all back again. Neither is a a good use of shareholders funds or management time IMHO.

You are entitled to your opinion, but oversupplying the market ( or merely meeting demand?) does not cost money. Au contraire, it raises money. No one has said that they are going to ‘buy them all back again’. In fact that seems highly unlikely.

Dod

[simoan]

This is the problem though i.e. all the buyback does is to provide liquidity for sellers. Why should the company use other shareholders money for that purpose? Ultimately, share prices are determined by supply and demand, and it turns out that CGT oversupplied the market by increasing its share count fivefold in as many years. That costs money, as does buying them all back again. Neither is a a good use of shareholders funds or management time IMHO.

You are entitled to your opinion, but oversupplying the market ( or merely meeting demand?) does not cost money. Au contraire, it raises money. No one has said that they are going to ‘buy them all back again’. In fact that seems highly unlikely.

Dod

I'm sorry but it costs real money to issue new shares, and it costs money to buy back shares. Do you think for some reason there are no transaction costs involved? I'd like to be their brokerage and rake in the fees. Money for old rope.

[daveh]

You are entitled to your opinion, but oversupplying the market ( or merely meeting demand?) does not cost money. Au contraire, it raises money. No one has said that they are going to ‘buy them all back again’. In fact that seems highly unlikely.

Dod

I'm sorry but it costs real money to issue new shares, and it costs money to buy back shares. Do you think for some reason there are no transaction costs involved? I'd like to be their brokerage and rake in the fees. Money for old rope.

I may be being stupid, but when they issue new shares don't they get paid for them with real cash from new shareholders, which they then invest in their portfolio, so though the number of shares in issue goes up the value of the portfolio goes up too as they have bought more of whatever they invest in? Also as they are selling share at above NAV they can buy their new investments at less than their actual value and vice versa when they buy back shares at a discount?

[simoan]

I'm sorry but it costs real money to issue new shares, and it costs money to buy back shares. Do you think for some reason there are no transaction costs involved? I'd like to be their brokerage and rake in the fees. Money for old rope.

I may be being stupid, but when they issue new shares don't they get paid for them with real cash from new shareholders, which they then invest in their portfolio, so though the number of shares in issue goes up the value of the portfolio goes up too as they have bought more of whatever they invest in? Also as they are selling share at above NAV they can buy their new investments at less than their actual value and vice versa when they buy back shares at a discount?

I believe you need to think this through a bit more. Issuing new shares and buying more assets makes no difference, particularly if performance is poor, as it has clearly been. Buybacks are a great way to transfer value from long-term to short-term shareholders. Why does the discount matter? It only matters if you’re a short-term holder. Or it might hurt your vanity if you’re the investment manager.