Merger mania

It seems that the investment trust arena is gripped by merger mania, with a record six mergers completed in the first half of 2024 alone and more completing or in the pipeline.

By far the largest and most high-profile of these deals – indeed, the largest merger ever to take place – is that of the multi-manager behemoths of the Global sector, Witan and Alliance Trust. 

It awaits shareholder approval but is expected to complete by October. The end result will be a global multi-manager trust overseen by Alliance Trust’s manager, Willis Towers Watson (WTW), and worth more than £5bn. 

The deal, precipitated by the retirement of Witan’s chief executive Andrew Bell, will mean WTW takes the helm of the whole portfolio. That involves reallocating Witan’s assets to Alliance Trust’s current ten-strong stable of specialist managers, though possibly retaining some of the existing Witan managers (two of which are already operating across both portfolios). 

“There are no capacity constraints among our managers, so the additional assets don’t create any issues,” adds Alliance Trust senior director Mark Atkinson. “We’ve always said the optimal number of managers is between eight and 12, and we don’t envisage moving out of that range.”

The Witan/Alliance trust marriage appears to be not just a very big but also a very comfortable match. “Both trusts share similar cultures and a mutual desire to provide a ‘one-stop shop’ for retail investors in global equities,” comments Andrew Ross, chair of Witan. 

The combination is likely to appeal to many investors, producing “a single multi-manager trust of significant scale with an imaginative portfolio of hard-to-access managers that is very difficult to replicate”.

Industry experts are equally upbeat about the deal. At Kepler Partners, analyst William Heathcoat Amory makes the point that while investment trust mergers take place for various reasons, “successful deals need to add value for both parties, providing synergies that amount to more than the sum of the parts”. In this case, he says, investors can expect to benefit all round.

For a start, with £5bn plus under management, the new entity will be catapulted into the FTSE 100, improving visibility among investors and boosting liquidity.

The increase in scale should also result in lower charges, with a new management fee structure targeting ongoing charges of less than 0.6%, compared with Witan’s current 0.96% and Alliance Trust’s 0.62%.

Additionally, the yield will rise to align with Witan’s interim payout – an increase of more than 6% for existing Alliance Trust shareholders, according to Mick Gilligan, head of managed portfolio services at broker Killik.

“It creates a real sector champion – large, liquid, good track record, sensible and easy to understand investment proposition, decent yield – that ticks a lot of boxes,” enthuses James Carthew, head of investment companies at QuotedData.

Does this merger of big beasts point to a sign of things to come in future? Not necessarily at the upper end of the scale: the Witan/Alliance Trust deal appears to be a particularly snug fit with unusual synergies, whose time has come. 

But it’s widely agreed that the investment trust sector as a whole could benefit from the removal of excess supply and duplication, which would help to shore up share values and encourage investors to return to the market. 

“More mergers seem likely as the investment trust sector retrenches and seeks to eliminate some of the wide discounts, lacklustre performance and duplication,” believes Andrew McHattie, publisher of Investment Trust Newsletter. 

He suggests that the UK equity income and UK smaller companies sectors are obvious areas where future mergers might materialise, given that “both contain a number of smaller trusts that arguably have little in the way of a unique selling proposition for potential investors”. 

Carthew points out that there has been some “sensible consolidation” of trusts with similar remits, a prime example being Henderson’s recent amalgamation of its European Focus and EuroTrust. 

However, more merger couplings could usefully take place. “Funds in abrdn’s stable have been very proactive in consolidating, for instance, but we still have Dunedin Income Growth and Murray Income doing much the same thing in the UK equity income sector,” he adds. 

It’s certainly the case, too, that investment trusts have come under pressure to become larger as wealth managers have consolidated in recent years, because these big investors need more substantial vehicles (ideally trusts with market capitalisation of at least £300m to £500m, according to Gilligan) in which to house the money they’re running. 

“2023 saw a lot of consolidation (with five mergers in total), and I expect this to continue,” Gilligan explains. “More than half the closed-ended sector is sub £300m and this is where I would like to see most of the action.” 

He points to the various AIC property sectors (excluding property securities) as another example of an area that would benefit from consolidation, with 31 out of 37 trusts valued at less than £300m. 

It’s not helpful to tar all small trusts with the same brush, but as Heathcoat Amory observes, where sectors offer too much choice and little strong performance, “Darwinian forces may over time lead to fewer trusts in those sectors.” 

Finally, it’s worth noting that there has been a dire shortage of new trusts coming to market; it’s possible that this is itself helping to fuel a merger mentality within the industry. In Carthew’s words: “The current focus on mergers may just be a reflection of a lack of IPO revenue for brokers. Once the sector perks up, merger mania may subside.”