Can you tell me whether you think shareholders might be better off if the millions of pounds spent by investment trusts such as Foreign & Colonial and Bankers on buying back their own shares in an effort to narrow the discount were used instead to increase dividends?

Additionally, perhaps allowing long-term shareholders to sell at par might offset the effects of a wide discount.
Jeffrey Simon, via email

Angus Rigby replies:
An investment trust is a company whose business is holding shares in other companies. They are similar to unit trusts in that they are collective investments, but they are also stock market-quoted companies with a fixed number of shares in issue. As a result, the price of an investment trust share will depend on both the performance of its investments and the demand for the trust’s shares themselves.

Investment trusts often trade at a discount to the value of their assets, and if demand for the shares falls, this discount will widen. When this happens, investment trusts can buy back their own shares to reduce the supply and therefore narrow the discount.

As Mr Simon says, increasing dividend payments rather than initiating a share buy-back could, arguably, narrow the discount more effectively by making the shares more attractive. However, investment trusts (a Victorian invention) have a well-established history of increasing or decreasing the number of shares in issue to match investor demand, and this custom is unlikely to change.

Angus Rigby is chief executive officer at TD Waterhouse