Update: The first investment company merger of the new year has been announced with Shires Income (SHRS) agreeing to fall on its sword and merge with stablemate Aberdeen Equity Income (AEI).

Shires, a £123m, 5%-yielding UK equity income trust run by Aberdeen’s Iain Pyle, will enter into voluntary liquidation with shareholders able to roll over into Aberdeen Equity Income, a larger, £199m, 5.6%-yielder in the same sector managed by Thomas Moore.

There will be a cash exit of up to 25% for Shires shareholders, which should leave the enlarged AEI with assets of between £289m and £320m, though that will still look comparatively small against the sector’s biggest trusts, City of London (CTY), Law Debenture (LWDB), Edinburgh (EDIN) and Temple Bar (TMPL), which have market values of between £2.7bn and £1.1bn.

This should lead to reduced costs for investors with annual ongoing charges capped at 0.78%, compared to AEI’s current 0.84% and Shires’ 1%. Aberdeen, which will remain fund manager, has agreed to cover all direct transaction costs.

Importantly, for shareholders in both high-yielding trusts, there should be no change to dividends with AEI, a “dividend hero” with a 25-year record of annual pay-out rises, saying the merger will strengthen its ability to pay a progressively rising dividend through revenue reserves and realised capital reserves. It is expected to distribute 23.1p per share in the current financial year to 30 September.

AEI, a mid-cap weighted portfolio, will also update its investment policy to include Shires’ ability to hold investment grade bonds and preference shares, which currently account for 19% of its assets, as well as selective positions in companies in developed markets outside the UK.

The merger – which requires the approval of both trusts’ shareholders – marks a further step in the rationalisation of Aberdeen’s investment trust range. The transaction – timetabled to occur at the end of this quarter – will leave it with two UK equity income trusts, including Dunedin Income Growth (DIG), down from four. The group is about to lose its long-standing mandate of Murray Income (MUT) after its board appointed rival Artemis as fund manager in November.

In the past year both Shires and AEI have done well with underlying returns in net asset value (NAV) either matching the FTSE All-Share in the case of Shires’ 25%, or exceeding it in the case of AEI’s 29% investment return. Over three and five years, however, they both trailed the benchmark’s 44% and 67% returns with 40% and 53% from Shires and 37% and 53% from AEI.

AEI, with its larger size and better share rating, with a price trading around NAV, was the obvious choice to lead the merger with Shires viewed by most analysts as “sub-scale” despite its better performance. Winterflood said a merger with the £369m Dunedin Income Growth was not feasible due to its weaker returns and wider discount of 7%.

The proposed merger follows what the Association of Investment Companies trade body called a “frenzy” of corporate activity in the sector last year with 27 mergers, acquisitions and liquidations surpassing the previous record of 24 set in 2024. The streamlining is a response to shareholder demands for action to improve their returns and revive share prices which, even after this corporate cull and the resolution of flawed cost disclosure rules, stand on an average 12.5% discount below the value of their investments.

AEI’s chair Sarika Patel claimed the merger was a “rare proposal” that was being taken from a position of strength. “Bringing together two high-quality investment trusts with aligned objectives, a shared management team and complementary portfolios, the enlarged company will benefit from greater scale, improved liquidity and lower costs,” she said.

Shires chair Robin Archibald said: “This is a constructive initiative designed to enhance and, most importantly, to try to encourage new investors to support a closed-ended investment company that can provide returns not available from open-ended alternatives by using the benefits of the closed-ended structure, including gearing, allocation of costs and use of reserves.”

Our view

James Carthew, head of investment company research at QuotedData, said: “I have a soft spot for Shires Income (which actually has a much better 10-year track record than Aberdeen Equity Income) as it was differentiated from the rest of the UK equity income sector. However, it was proving hard to grow it, and some combination was perhaps inevitable. AEI is having a good run – it was a serious contender in my mind to take over Murray Income – and SHRS shareholders should benefit from lower fees, a marginally better rating, and a higher yield. If I was a shareholder, I’d roll into AEI rather than take the cash option.”