Consolidation is a growing theme across the investment trust sector against a backdrop of stubbornly-wide NAV (net asset value) discounts and increasing pressure on sub-scale funds.
2024 is already a record year for M&A (mergers and acquisitions) in a sector which has just seen the eleventh such deal announced, the value-oriented Invesco Asia Trust (IAT) planning to combine with Asia Dragon Trust (DGN) to form Invesco Asia Dragon Trust.
With analysts highlighting that further sector consolidation is needed, this mergers trend, which Shares discussed in depth on 5 September, is only set to continue.
COME TOGETHER, RIGHT NOW
At the time of writing, nine investment trust mergers have already completed in 2024, the standout deal being the mega-merger of Alliance Trust and Witan to create Alliance Witan (ALW), while JPMorgan Japan Small Cap Growth & Income has just combined with JPMorgan Japanese (JFJ) to create a larger, more liquid vehicle.
That number will become 10 once Artemis Alpha Trust (ATS) folds into Aurora Investment Trust (ARR) later this year to form Aurora UK Alpha.
In short, sub-scale, underperforming funds are combining with larger rivals with similar remits to remedy wide discounts and create trusts large and liquid enough to attract wealth managers and retail investors.
And with activists nosing around, this major trend looks set to persist for a while yet, though negative consequences are that some good strategies will go to the wall in this process of creative destruction and choice for investors will be reduced.
THE WINTERFLOOD VIEW
In a note published last month, Winterflood analyst Elliott Hardy said: ‘Generally, we expect shareholders to benefit from a larger, more liquid vehicle with lower costs and the possibility of index inclusion, particularly in cases where the investment strategy has commonalities.’
‘For instance, FTSE 100 inclusion was a key driver behind the merger between Alliance Trust and Witan, previously two of the largest 30 trusts in the sector, demonstrating that even larger funds may be inclined towards consolidation.’
Hardy added: ‘In many of the conversations we have with clients, liquidity is widely regarded as an important issue within the sector. Many point towards an ever increasing minimum size threshold which makes a significant number of funds within the sector “uninvestable” on a liquidity and concentration basis.’
Accordingly, Winterflood recently updated its methodology to identify potentially sub-scale funds where it believes corporate action may be aligned with shareholder interests, increasing the methodology market cap threshold from £200 million to £300 million.
Below this threshold reside funds ranging from BlackRock Income & Growth (BRIG) and Baker Steel Resources (BSRT) to Shires Income (SHRS), Schroders Capital Global Innovation (INOV) and Fidelity Japan Trust (FJV).
‘That said, we note that a fund’s size is a rather blunt proxy for how it trades in the secondary market,’ stressed Hardy. ‘Other factors, such as the diversity of a shareholder register, whereby a register compiled across a diverse range of institutional and retail investors, each with different investment horizons and motivations for buying and selling at certain times, may result in a better liquidity profile.’
THE ‘GO-TO’ ASIA TRUST
Invesco Asia Trust and Asia Dragon Trust plan to merge to form Invesco Asia Dragon Trust, with the former as the continuing company boasting net assets north of £800 million and the potential for FTSE 250 inclusion.
Invesco Asia’s board wants to make the enlarged company the ‘go-to’ Asian trust for investors ‘trading on a premium rating, growing organically and also through further combinations’.
On completion in Q1 of 2025, investors will have exposure to a contrarian total return strategy pursued by Fiona Yang and Ian Hargreaves, which seeks out mispriced, quality Asian and Australasian companies with strong balance sheets, as well as from greater economies of scale and liquidity and a more competitive management fee structure expected to reduce Invesco Asia’s ongoing charges ratio from the current 1.03% to less than 0.7%.
This is an unusual combination in that Invesco Asia, the smaller of the two, is acting as consolidator, but this reflects Invesco Asia’s superior track record following a strong run of performance for its value style between mid-2020 and late 2023.
In contrast, Asia Dragon has disappointed for years and a full strategic review was ultimately triggered in May 2024 following an approach by the smaller Ashoka WhiteOak Emerging Markets (AWEM).
This potential merger was effectively kiboshed when Asia Dragon’s board stressed it was looking for ‘established fund management groups with experience of managing equity strategies similar to that currently pursued by the company’.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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