Why bigger could be better

Wow. While consolidation in the investment trust industry has been an ongoing theme of the past couple of years, this week’s announcement of a merger between Alliance Trust and Witan came as a surprise. Similar deals announced in the industry have largely been between much smaller funds – and often in specialist areas. But these are two genuine big beasts of the investment trust world – long-established stalwarts of the Global sector.

Indeed, assuming the deal goes through smoothly, the new trust, to be known as Alliance Witan, will have more than £5bn worth of assets. It will comfortably qualify for inclusion in the FTSE 100 Index of the UK’s largest companies, joining the likes of Pershing Square Holdings and Scottish Mortgage Investment Trust.

In fact, scale is part of the rationale for the deal. For one thing, the move into the FTSE 100 means every index-tracking fund following this benchmark will be required to invest in Alliance Witan. That will provide a valuable boost to liquidity and sustain demand for the stock at a time when falling appetite for shares in many investment trusts has seen their prices slip to wider discounts to the value of their underlying assets.

In addition, greater size brings other benefits. Alliance Witan is expected to keep its annual management fee below 60 basis points, which would represent a saving for investors in both existing funds (and particularly for those in Witan). It will help that Willis Towers Watson, the investment consultant in charge of Alliance’s multi-manager approach to portfolio management, has agreed to pay a chunky proportion of the costs incurred during the merger.

Against that backdrop, there are two ways to look at this deal. You might see it as an admission of defeat – a tacit acceptance that even the most established investment trusts now need to do something radical to survive what is proving to be a difficult period for the industry. 

The alternative view is to see this arrangement as showcasing the strengths of investment trusts. The boards of these two companies have focused on what will deliver the best possible outcome for their respective shareholders – in terms of reduced charges, a narrower discount and, hopefully, improved performance. They have then taken bold action, putting the interests of investors above their own egos and the fee incomes currently enjoyed by their current advisers and managers – some of whom are likely to be disadvantaged by the deal.

It's a reminder of why the governance structure of an investment trust is so important, even though there are times when it feels somewhat abstract. Every trust is a listed company with an independent board of directors who have strict fiduciary responsibilities to serve shareholders. That’s quite a contrast to the broader investment industry, which largely consists of asset managers selling products to investors; some of those products work better than others, but the suspicion is always that it’s their own interests that matter most to product providers.

Will we see further mergers on the scale of the Alliance-Witan tie-up? Many investment trust analysts think this is now likely given the pressures in the market and the business case put forward by Alliance and Witan themselves.

Still, it’s worth remembering that whether any of these deals go ahead is ultimately down to shareholders. They will get a vote on merger proposals – probably in September in the case of Alliance Witan – and therefore have the power to shoot deals down if a majority oppose them. Again, it’s a reminder that in an investment trust, it’s the investors, not a product provider, that ultimately call the shots.