STS Global Income & Growth (STS ) is looking to narrow the gap with its largest rivals by combining with stablemate Troy Income & Growth (TIGT ).

Earlier this month, Troy Income announced it was suspending share buybacks ahead of a possible merger, which today it revealed was with STS Global Income, which is also managed by Troy Asset Management.

If shareholders in both investment trusts approve, TIGT, a UK equity income fund with net assets of £163m, will merge with the £200m STS in around March next year.

Although Troy Income shareholders will have the chance to withdraw all their money at a 2% discount to asset value, rather than roll over into a global fund, the company is banking that only 20% will do so.

That will leave the enlarged STS with about £330m of assets, putting it just behind the £345m Henderson International Income (HINT ) but still dwarfed by the Global Equity Income sector’s biggest funds, £1.6bn Murray International (MYI ) and £2bn JPMorgan Global Growth & Income (JGGI ).

Winterflood analyst Emma Bird said that even in the unlikely scenario that no TIGT shareholders cashed out, swelling the combined entity’s net assets to £350m, it may still be considered sub-scale by some big wealth managers.

Bridget Guerin, TIGT’s chair, said the merger would give its shareholders access to a larger, more liquid and cost-efficient fund with access to a ‘global opportunity set’ while offering 32% exposure to the UK. 

Managed by Jamies Harries, STS operates a similarly conservative investment style to TIGT under Blake Hutchins and Hugo Ure. It has a considerable overlap with Troy Income with 15 UK stocks, such as Unilever (ULVR), Reckitt Benckiser (RKT) and Relx (REL), in common, accounting for 49% of the latter’s assets.

This reflects Harries’ belief that the UK is highly undervalued.

While the choice of STS, rather than another UK equity income trust, as a merger partner may raise eyebrows, by giving Troy a chance to retain the assets rather than let them go to a rival fund manager, Troy Income has struck a keen deal.

Troy has waived its management charge for 18 months for TIGT investors who roll over to STS.

That £1.1m contribution to costs combined with the 2% exit discount and the fact that new STS shares will be issued at a nil-premium means that Troy Income shareholders should receive 99.7% of the value of their holdings, the company said.

Troy will also reduce its 0.65% annual fee on STS to 0.55% of shareholders’ funds up to £250m and 0.5% above that, in line with Troy Income.

TIGT shares gained 1p, or 1.4%, to 67.4p and STS softened 1.4p, or 0.7%, to 215.6p.