Aberdeen trusts bid to form China trust in eye of storm

Aberdeen Emerging Markets and Aberdeen New Thai surprise investors with plan to merge and form a new China investment trust as country’s stock markets reel from this week’s sharp sell-off.

Aberdeen Emerging Markets (AEMC ) and Aberdeen New Thai (ANW ) have surprised their smaller investors with a plan to merge and form a new China equities investment trust, even as the country’s stock markets continue to reel from this week’s sharp sell-off.

The combination of the two trusts within the Aberdeen Standard Investments stable is certain to raise questions over the wisdom of the move after China’s authorities scared investors with a crackdown on online education companies. This intensified concerns over a broader crackdown on Chinese technology companies with shares in US-listed ‘Golden Dragon’ stocks plunging 22% this month.

After mounting modest rallies in the past two days, existing China trusts have eased back today with JPMorgan China Growth & Income (JGCI ), for example, down 1.6% today, extending its fall in the past week to over 15%.

However, the initial response to the two Aberdeen trusts has been positive. The £322m Aberdeen Emerging Markets has jumped 4.5% and the £63m sub-scale New Thai trust has risen 2% as investors express relief at the opportunity the merger will give to get 15% of their money out in share tenders at fair value.

Shares in both trusts have traded on wide discounts below net asset value for some time and had launched strategic reviews to remedy their disappointing performance. By merging, they will make it easier for the new company to help re-rate the stock with share buybacks.

For AMEC, the merger will also mark a break from its long-standing approach of investing in other emerging markets funds, which has become unpopular with investors due to the higher costs it entails.

For ANW investors, the decision to wind up the company and switch to the much larger and dynamic market of China is hoped to increase returns.

Although this week’s events have heightened the political risks of investing in China, both boards believe the world’s second-largest economy still offers long-term opportunities from rising affluence, growing adoption of technology and financial services and the challenge of greening the biggest global emitter of carbon gases.

Both companies have chosen to retain ASI as fund manager pointing to the over £4bn it has invested in Chinese shares and the strong long-term performance of its China A and All China equity funds based in Luxembourg.

If shareholders approve, the new trust will hold 30-60 Chinese stocks and start with 60% in ‘A’-shares listed in Shanghai and Shenzhen. 

Aberdeen Emerging Markets will shortly call a general meeting for its shareholders and publish a prospectus detailing the proposals for the new trust. The merger is expected to occur at the end of the year, with the trusts’ biggest shareholders - holding about 79% of AEMC and 58% of New Thai - having been consulted and given their support.

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