Two of the biggest investment trusts are combining in the sector’s largest-ever merger, with Witan (WTAN) to be rolled into Alliance Trust (ATST) in a mega-deal expected to complete later this year.

The combination of these two FTSE 250 constituents will create ‘Alliance Witan’, an investment trust goliath with net assets north of £5 billion and big enough for FTSE 100 inclusion.

Shares in Witan rose 4.5% to 272.5p on the day of the news (26 June), while Alliance Trust’s shares ticked up 1% to £12.14.

GLOBAL ONE-STOP SHOP

Representing the largest-ever conventional equity investment trust combination, the merger follows a comprehensive strategic review of Witan’s management arrangements by the board after long-serving chief executive Andrew Bell announced plans to retire.

Both trusts follow a multi-manager approach and their boards believe the combination will create an ‘even more liquid, high-profile and cost-efficient “one-stop shop” investment vehicle’ for global equities.

Alliance Trust’s current manager, Willis Towers Watson (WTW:NASDAQ), will assume overall responsibility for managing the assets of the combined fund using the same multi-manager approach it has since it was appointed in 2017, selecting a diverse team of stock pickers, each of whom invests in a selection of 10 to 20 of their ‘best ideas’.

Over the seven years since Willis Towers Watson’s appointment at the start of April 2017 to 31 March 2024, Alliance Trust’s NAV (net asset value) total return was 104.2% against 95.7% for the MSCI All Country World Index benchmark.

Witan shareholders who roll over into Alliance Witan will benefit from an immediate uplift in the value of their shareholding, since Alliance Trust’s shares trade at a tighter discount to NAV than Witan’s; they’ll also be given the opportunity to elect for a cash exit at a price close to NAV.

A new management fee structure and economies of scale resulting from the merger will allow Alliance Witan to target an ongoing charges basis points ratio in the high 50s in future financial years, below Witan’s and Alliance Trust’s current ongoing charge ratios of 76 and 62 basis points respectively.

Witan chairman Andrew Ross said the board was ‘unanimous’ in recommending the combination, which ‘allows the continuation of our multi-manager approach at lower fees and in a larger, more liquid vehicle. The companies share similar cultures and a mutual desire to provide a “one-stop shop” for retail investors in global equities. I am delighted to announce this transaction, the largest-ever investment trust combination, in Witan’s 100th year as a quoted company on the London Stock Exchange.’

THE EXPERTS WEIGH IN

Deutsche Numis analyst Ewan Lovett-Turner says in relation to Witan: ‘The fund has underperformed in recent years. It was hurt by a transition to have more growth mangers, which were hit in the 2021/22 growth sell-off. In addition, the exposure to specialist funds such as unquoted growth companies, emerging markets and investment trusts which saw discounts widen has also been a headwind to performance of late.’ 

On the deal in general he adds: ‘The merger appears to be well-structured and we agree that there are benefits of creating a scale player, with an improved fee structure and a manager’s cost contribution.’ 

Winterflood Investment Trusts points out that against a backdrop of sustained wide discounts and increasing pressure on sub-scale funds due to wealth manager consolidation, the last two years has seen ‘a significantly elevated level of corporate activity in the investment trust sector, including numerous mergers. However, none so far have been of this scale, with two of the top 30 largest investment trusts proposing a merger to create a circa £5 billion fund eligible for FTSE 100 inclusion’.

Winterflood adds: ‘We think the combination of Witan and Alliance Trust makes sense and is not a great surprise given the recent announcement by Witan it was reviewing its management arrangements and the similarities between the two funds’ investment approaches, with both being multi-manager global equity funds.’

However, as one professional fund manager put it to Shares, merging the assets without incurring ‘massive’ dealing costs will be a major challenge given the two trusts have wildly different portfolios and only one adviser in common.

‘The portfolio managers will have to absolutely ruthless, otherwise they risk being landed with a mass of holdings which counter each other out,’ observed the manager.

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