Aberdeen Equity Income (AEI) and sister trust Shires Income (SHRS) are lined up for the first investment trust merger of 2026.

A proposed combination between the two equity income trusts will see the £121m Shires become part of the £200m AEI.

The merged vehicle could become as large as £320m after the event, though SHRS shareholders will be offered a cash exit of up to 25% of issued capital.

Sarika Patel, chair of AEI, expects the enlarged vehicle to be between £289m and £320m, adding that shareholders will benefit from ‘greater scale, improved liquidity and lower costs’.

Following completion, and subject to shareholder approval, AEI will update its investment policy to incorporate SHRS’ ability to invest in investment-grade fixed income and preference shares, as well as its selective exposure to overseas equities in developed markets.

Annual ongoing charges will be capped at 0.78%, compared with AEI’s current 0.84% and SHRS’ 1%. There should be no reduction in dividend income for shareholders in either fund, both of which currently yield around 5%.

Aberdeen has agreed to cover all direct transaction costs in excess of any contribution arising from the SHRS cash exit, which is priced at a 2% discount to net asset value (NAV), with further details to be published in February.

Aberdeen began the year with four investment trusts in the UK Equity Income peer group, including Dunedin Income Growth (DIG) and Murray Income (MUT), but could soon be down to two as MUT prepares to transfer management to Artemis.

Winterflood’s Emma Bird described the proposed merger as a ‘sensible outcome’, with both sets of shareholders ‘benefiting from a larger, more liquid and lower-cost vehicle, with the cost advantages of scale further supported by an OCF cap that is notably lower than the current figure for either fund’.

‘We acknowledge that some SHRS shareholders may have preferred a merger with a fund with a stronger performance record, as AEI and SHRS have both underperformed the FTSE All Share over the last three and five years in NAV total return terms,’ she added.

AEI’s NAV is up 37% over the past three years and 53% in the past five, according to data from the Association of Investment Companies. SHRS has increased 39.5% and 53.4% respectively over those periods.

Their shared benchmark index climbed 43.5% over three years and 67.1% over five.

Bird also added: ‘We suspect that Aberdeen’s cost contribution will have been a key determinant of merging with an in-house fund, with AEI being the only feasible option, as Murray Income is due to move its management to Artemis imminently, and Dunedin Income Growth trades at a considerably wider discount (currently 7%), has a poorer performance history  and offers a lower dividend yield.’

Bird noted that as AEI has traded at a premium for much of the past year, shareholders wishing to exit post-merger may be able to do so at prices close to NAV.