Independent (IIT ) investment trust is to merge with Baillie Gifford heavyweight Monks (MNKS ) in October after the retirement of stalwart fund manager Max Ward.

Shares in the UK equity trust, which have fallen to trade at a steep 19% discount after weaker performance in recent years, leapt 11% to 450p following news of the planned tie-up with Monks, a highly-rated global portfolio run by Ward’s former employer. 

Shareholders in £210m Independent have been given the option to roll over into Monks without triggering capital gains tax or make a full cash exit at a 2% discount to net asset value (NAV), the board announced today. 

The benefits of rolling over include a more diversified portfolio, with the much bigger £2.3bn Monks, managed by Baillie Gifford’s Global Alpha team led by Spencer Adair, focused on fast-growing but larger global companies, marking a shift from Independent’s core of smaller and medium-sized UK stocks. 

Baillie Gifford, the Edinburgh firm where Ward worked before striking own on his own two decades ago, will offer a cost contribution by way of a six-month fee waiver on the value of assets rolling over, which will also benefit Monks shareholders. Independent will pay a pre-liquidation dividend, the board said.

Independent’s directors, most of whom also share associations with Baillie Gifford and own a combined 24.3% of the trust, have stated they will roll their shares over. None of them will join Monks’ board.  

Chair Douglas McDougall, a retired Baillie Gifford fund manager, is the trust’s second largest shareholder with a 15.4% stake, according to Refinitiv. 

Ward, who turns 73 this month according to Companies House filings, told Investment Trust Insider in 2017 that he intended to manage the closed-end fund into his seventies, when it would be given a ‘decent burial’ or rolled into another investment vehicle.

He is closely associated with Baillie Gifford, where he managed global flagship investment trust Scottish Mortgage (SMT ) from 1989 to 2000, before handing over the reins to James Anderson.

‘We can see the benefits of the deal for Monks shareholders who should benefit from being in a larger, more liquid vehicle, with costs spread over a wider asset base and a fee waiver on rolling over assets. The Monks board comments that it will receive a portfolio of UK growth stocks as well as an inflow of cash,’ said Numis analyst Ewan Lovett-Turner.

The analyst added that the structure of the merger ‘appears sensible’ even if it presents a ‘significant shift’ from Independent’s UK focus, while noting the rollover may be popular as many shareholders will be ‘sitting on substantial capital gains’.

Ward has a stellar record as manager of Independent. Since launch in October 2000, NAV has skyrocketed 688% compared to the FTSE All-Share’s 197% and the MSCI World index’s 326%.

Recently, performance has been knocked as the rotation to cheaper ‘value’ stocks took its toll on the ‘growth’ portfolio. NAV has fallen 21.8% year to date, compared to a 0.3% rise for the FTSE All-Share and a 3.1% fall for the MSCI World, according to Numis. Housebuilders, tech and retail holdings have suffered in recent months, dragging performance down.

Year to date, Monks has fallen further than Independent, with NAV falling 24.8% and starting to eat into the longer term record of outperformance. Over 10 years, the trust has returned 241.6% compared to the MSCI World’s 215%, according to Numis. 

Tech, financials and consumer discretionary stocks constitute the bulk of the portfolio with a combined weighting of 40.9%. Top holdings include US health insurance provider Elevance Health (formerly Anthem), Dutch internet group Prosus and Schiehallion (MNTN ), a trust focused on fast-growing and mostly private companies also run by Baillie Gifford.  

Adair took over as lead manager of Monks in April last year, following Charles Plowden’s retirement.