Witan (WTAN ) is to merge with multi-manager rival Alliance Trust (ATST ) to create a £5bn giant, marking the largest-ever investment trust merger.

The boards of the two trusts announced they would merge to create Alliance Witan after a strategic review by the Witan board, which was triggered by the planned retirement of the £1.6bn fund’s chief executive Andrew Bell.

The new fund will follow the investment approach of Alliance Trust under Willis Tower Watson (WTW), which selects 10 external fund managers globally, rather than Witan’s self-managed style. The merger is subject to shareholder approval and due to complete by late September or early October.

Witan’s chair Andrew Ross and Alliance’s chair Dean Buckley said the combined global equity multi-manager trust would charge lower fees of less than 0.6% in future financial years, which would be a significant saving for Witan shareholders who pay ongoing charges of 0.76%, while Alliance Trust charges 0.62%.

The new entity will also be eligible for inclusion in the top-flight FTSE 100, which would bring greater liquidity and make it only the fourth investment company listed on the blue-chip index.

Buckley said the enlarged equity investment vehicle would enjoy the quality, cost efficiency and profile to play a leading role in the UK investment market, as well as the attention of the world’s best fund managers.

The Willis Towers Watson approach

Witan shareholders have endured poor performance in recent years and will benefit from Alliance manager Willis Towers Watson’s better track record, which has been driven by a slightly different approach.

Chair Andrew Ross, who will be deputy chair at the enlarged trust, told Citywire that Witan’s board was absolutely unanimous in maintaining the multi-manager approach, which shareholders bought into when it took up the style 20 years ago.

‘We really did not want to risk taking a group of shareholders used to spreading risk across several managers out of that at the top of the risk cycle,’ Ross (pictured at a recent Citywire board members’ roundtable) said.

Willis Towers Watson adopted the multi-manager approach when it won the Alliance Trust mandate in 2017. Under managers Craig Baker, Mark Davis and Stuart Gray, the fund allocates capital to around 10 managers, who buy up to 20 stocks.

While there is some overlap, with both trusts allocating to emerging markets specialist GQG and global quality investor Veritas, Baker emphasised Alliance’s difference in focusing on blending companies with no consideration given to index, country or sector weightings.

‘Secondly, we bring managers to the fold that are the best in the world at what they do, not just the ones in the UK retail space. We ensure that we’re risk managing the portfolio to maximise returns, where stock selections drive everything,’ Baker told Citywire.

The chairs did not rule out carrying over some of the Witan managers, which has exposure to Lindsell Train and Artemis, among others including climate change fund GMO. Willis Towers Watson will contribute £7.5m to the cost of merging the portfolios.

Baker said Witan’s investment company holdings, Sycona (SYNC) and VH Global Sustainable Energy Opportunities (GSEO), which are suffering badly in a sector-wide derating, would be kept on to avoid ‘fire selling’. There will be discussions over retaining the poorly performing GMO climate change fund, he said.

Exit opportunity and increased dividend

While Witan’s chief executive Andrew Bell is retiring, investment director James Bell will be working closely with Willis Towers Watson to see what role he could play in the merged trust, Alliance’s Buckley (pictured) said, adding he was ‘optimistic he would play a significant role’.

As part of the merger, Witan shareholders will be given the opportunity to redeem their shares for cash at a 2.5% discount to net asset value, but this would be limited to 17.5% of Witan’s shares in issue.

‘Capping the exit opportunity to 17.5% was a judgement call. It’s important to give Witan shareholders a partial cash exit – Alliance Witan will obviously be a different proposition to the one they bought into and enjoyed,’ Buckley said, adding that the figure balanced the interests of both sets of shareholders.

Alliance Trust shareholders are not expected to suffer any NAV dilution from the direct costs of the transaction. Witan shareholders are expected to suffer no or minimal NAV dilution, depending upon the level of take-up of the cash exit option.

Alliance Witan will increase its third and fourth interim dividends for the financial year ending 31 December to bring these in line with the first interim dividend of 1.51p per share paid to Witan shareholders earlier this month.

In lieu of a normal second interim dividend, Witan shareholders will receive an interim pre-liquidation dividend expected to be no less than 1.75p per share.

Shares in Witan jumped 2.9% to 268.5p on Wednesday morning, narrowing its discount to about 5%, while Alliance Trust shares gained 0.5% to £12.10, putting them on a 0.5% discount. Alliance’s board has been more active in buying back shares, spending £51m over the last 12 months.

Since Willis Towers Watson took on Alliance Trust in April 2017, it has delivered underlying returns of 101%, versus the index’s 112%, while Witan has gained 60%, according to Morningstar data.

A logical outcome

Deutsche Numis’ Ewan Lovett-Turner said the merger appeared to be well-structured and agreed with the benefits of creating a larger trust, as well as maintaining a multi-manager approach, pointing out that premium-rated JPMorgan Global Growth & Income (JGGI) would likely have been one of Witan’s suitors.

‘Ultimately, the strength of the offering is dependent on delivering on the promises of consistent outperformance, seeking to outperform the MSCI AC World index by 2% per year over rolling three year periods,’ he added.

Stifel’s Iain Scouller pointed out that being listed on the FTSE 100 was a ‘double-edged sword’ as the shares can be highly influenced by ‘basket trades’ and other index activity, which can increase share price volatility.

But he concluded that the merger made sense for shareholders and was a logical outcome of the review process. He upgraded his rating for Alliance Trust from ‘negative’ to ‘neutral’ and downgraded Witan from ‘positive’ to ‘neutral’.