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How investment trust mergers are unlocking value for investors

A range of high-profile investment trust mergers have been announced recently, sending ripples of change across markets. Find out what this means for investors.

| 8 min read

Investment trusts are collective investments like funds, but they are structured as companies. This means they can be subject to corporate activities such as acquisitions, mergers and even wind-ups should shareholders choose to vote that way in any ‘continuation vote’.

Ordinarily this type of activity is thin on the ground. Yet with investment trust boards increasingly focused on value for money and shareholder returns, amid wide discounts and activist investors sniffing around, there has been a notable increase.

Often persistently wide discounts are a function of low investor appetite owing to one or several factors:

  • Size – institutional investors want to make sure there is enough supply and demand to buy or sell shares with ease (‘liquidity’) which means they can only use larger trusts.
  • Charges – assorted services costs are fixed, leading to high ongoing costs for smaller trusts that eats into investor returns.
  • Competition – not enough demand for the asset class or manager, owing to performance or other reasons, or simply too much supply in terms of the number and scale of trusts in the sector.

Over time each of these issues can be resolved should investment trust boards choose to be proactive. Charges can be reduced if feasible. A total of 18 trusts have made fee changes to benefit shareholders so far in 2024 to help make their trust more appealing. Meanwhile, share buybacks can help mop up excess shares resulting from lack of demand.

Meanwhile, a merger can be a real silver bullet for addressing a persistent discount. Combining two or more smaller trusts can create a single more appealing vehicle that offers greater liquidity and economies of scale.

It is also worth noting the board of directors of an investment trust can recommend winding it up if there are no other workable means of addressing the discount issue and it is deemed to be in the interests of shareholders. If shareholders agree, this means selling the portfolio over a sensible timescale according to the nature of the assets and distributing proceeds to investors. If well managed this process can unlock significant value where a trust is trading at a discount, so long as assets are realised close to their net asset value or, ideally, even more.

Investment trust mergers in 2024 so far

There have been six mergers between investment trusts in 2024, which makes it a record year already. According to the Association of Investment Companies (AIC), the previous record was five mergers in each of the years 2021 and 2022.

The biggest merger so far is the combination of Tritax Big Box REIT and UK Commercial Property REIT in May, creating a company with total assets of £5 billion.

Investment trust mergers in the first half of 2024

Merged investment companies in 2024 (continuing company in bold)Association of Investment Companies sector
Jan

Henderson High Income

Henderson Diversified Income
UK Equity & Bond Income
Debt – Loans & Bonds
Feb

JPMorgan UK Smaller Companies

JPMorgan Mid Cap

UK Smaller Companies

UK All Companies
Mar

Fidelity China Special Situations

abrdn China

China / Greater China

China / Greater China
Mar

JPMorgan Global Growth & Income

JPMorgan Multi-Asset Growth & Income

Global Equity Income

Flexible Investment
Mar

STS Global Income & Growth

Troy Income & Growth

Global Equity Income

UK Equity Income

May

Tritax Big Box REIT

UK Commercial Property REIT

Property – UK Logistics

Property – UK Commercial

Source: The Association of Investment Companies

A seventh merger is set to complete soon, between Henderson European Focus and Henderson EuroTrust.

What does it mean for investors?

We believe investment trust mergers, along with other actions such as buybacks and fee reductions, are encouraging trends for investors.

There is no point in ‘zombie’ trusts hobbling along for years without enough investor support. A Darwinian process that results in a smaller but more appealing universe of vehicles on offer to investors is welcome.

A potential ‘mega-merger’ of two of the UK's most popular trusts, Alliance Trust and Witan to create Alliance Witan PLC will represent a further crescendo in activity. The deal is expected to be completed later this year, subject to shareholder approval from both trusts and follows a comprehensive strategic review by Witan’s board.

We believe the merger makes sense given the similarity in investment approach. It would create a larger £5 billion ‘multi-manager’ investment vehicle where the portfolio managers select a range of specialists to oversee different elements of the portfolio. In addition, the larger vehicle should be more cost efficient and offer better liquidity.

The transaction could prove to be a seminal moment for the investment trust world. It is further evidence of investors’ appetite for scale, liquidity, and low costs. It will also increase pressure on other trust boards to ensure their own investment companies remain fit for purpose.

There are still trusts where boards are more reticent to the concept of consolidation. After all, the process generally involves turkeys voting for Christmas. A consolidated sector means a smaller number of board positions available. Yet increasingly boards are prepared to consider all options to deliver value for shareholders. While mergers and buybacks are at record levels, many other strategic reviews have been announced with seven trusts deciding instead to wind up and return capital to shareholders so far this year.

As this trend plays out it means discounts across the investment trust world should narrow over time, potentially boosting returns for investors. In addition, some less unpopular and very small trusts could have a moment in the sun in terms of share price returns if a merger into a larger vehicle is announced, or value is expected to be released by another means such as a wind-up.

How Charles Stanley is helping drive investment trust consolidation

Our Collectives Research Team has regular constructive meetings with board chairs and brokers to share our views and press for change where we believe it is warranted. Ultimately, we believe this will help create a better, leaner investment trust sector.

In respect of our holdings in smaller trusts under discretionary management, we are prepared to vote against continuation if we believe it’s the right thing to do for shareholders. There are some specialist trusts where a smaller asset base is necessary and advantageous, but quite often smaller vehicles are not viable.

We have been impressed with many of the boards (and in some cases portfolio managers) we have engaged with for listening and acting on our constructive feedback. However, others have been less keen on our suggestions, preferring, for instance, to see themselves as the potential vacuum rather than the dust in any merger and acquisition activity.

When engaging with the more popular, larger trusts our conversations are different but similarly focused on the interests of shareholders. They have ranged from sharing our views on capital allocation to providing insights on open-ended fee comparisons for them to use in negotiations with their investment managers.

We will also often encourage them to be proactive in seeking to absorb sub-scale peers where this is both suitable and to the benefit of both trusts. Importantly for shareholders in a takeover target, if merging into a peer is structured in the right way it does not trigger a disposal for capital gains tax purposes.

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