Investor Insights Podcast #22 - Peter Spiller, Founder and CIO of CG Asset Management

In Episode #22 we spoke to Peter Spiller, CIO of CG Asset Management, a business he founded in the year 2000. Peter is one of the most experienced fund managers in the UK, having managed the London-listed Capital Gearing Trust since 1982.
In each episode of our Investor Insights Podcast we will be interviewing portfolio managers from across the investment industry to gain from the expertise in their specialist areas and to question them on the topical issues.
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[@rajibear77]

Is it always the case that buybacks are the best capital allocation policy or it should be compared to what potential returns you would get from new investments or adding to existing ones? if the portfolio is at a discount at 12% and a new investment is at a 30 % discount to intrinsic value why would buybacks be the automatic capital allocation choice?

[@GordonSmith-Killik]

Thank you, a really important question. In my view, it actually isn’t a case of ‘one or the other’ in this instance. Decisions should be made with the aim of maximising net asset value (NAV) per share returns. There is a level of certainty of return which can be achieved from share buybacks by many Investment Trusts (ITs). If you consider an IT which invests in a large, liquid, market traded, traditional portfolio (such as one invested in a portfolio of quoted equities, as was the example of Smithson given in this episode), the investment manager/board can have strong confidence in the daily published NAV being a good representation of ‘realisable’ value of the underlying portfolio on that day (+/- trading costs and market timing). If the IT share price currently reflects a discount to this NAV per share (using 12% as an example), there is an option to sell pro-rata a portion of the underlying portfolio and use the proceeds to buy back the IT shares. This process is instantly accretive to NAV (i.e. buying something for 88p which is realisable at 100p today). It is maximising NAV per share returns which should be the key consideration, even if this means the overall size of the IT (number of shares in issue) shrinks during a period of weaker sentiment. In contrast, when assessing a new investment for the underlying portfolio, using the example of one which currently trades at a 30% discount to ‘intrinsic’ value, there is less certainty as to whether the discount on this specific investment can or will be realised and how long that might take (this will be dependent on the market changing its current view). The investment may well be attractive and if the investment manager assesses it to be more compelling than something already in the existing portfolio, the investment should still be made but this should be at the expense of a less attractive existing constituent (i.e. an assessment of competition for capital within the portfolio). Crucially, this decision is separate to the buying back of the company’s own shares. These decisions clearly become more complicated when less liquid/unquoted investments and fixed borrowing is a feature. I hope that helps. Feel free to get in touch via the podcast email address if you would like to discuss further.