Alliance Trust and Witan are to join together in the biggest investment trust merger in history and create the industry’s sixth-largest investment company with around £5bn in assets under management.
The announcement, made this morning, comes after Witan had previously announced a strategic review of the £1.6bn trust, brought about by the impending retirement of chief executive officer Andrew Bell.
Alliance Trust’s investment manager, Willis Tower Watson, will manage the combined entity, which will be rebranded as Alliance Witan. Its investment process will be the same as the current £3.4bn Alliance Trust strategy, with different fund managers investing in 10-20 stocks.
The merger will propel the investment trust up the UK market in terms of its size and could potentially mean it is large enough to be included in the FTSE 100.
If this happens, passive funds investing in the FTSE 100 will be forced to buy the trust for the first time, while FTSE All Share trackers will be required to buy much more of the investment company.
While typically viewed as a key benefit for stocks, Darius McDermott, managing director of Chelsea Financial Services, said he was not convinced this would have too much of an impact.
“When you go into an index you get a surge in your share price because the index funds have to buy it, but in the long run it doesn’t matter,” he said.
However, there are reasons for optimism. For Witan shareholders, the charges drop is a significant benefit. At present, Witan charges 0.76% in ongoing charges (OCF), more than Alliance Trust backers are charged (0.64%).
Still, the combined entity will reduce costs further, however, down to a figure in the “high 50s” and McDermott noted that this was “welcome”.
“I would hold for the fee reduction alone if I owned it,” he said. It is worth noting however that investment trust charges are not the same as open-ended funds.
Witan’s shareholders could also benefit from markedly improved performance. Indeed, Alliance Trust has beaten Witan over one, three five and 10 years, with the former trouncing the latter by more than 100 percentage points over the decade, as the below chart shows.
Performance of trusts over 10yrs
Source: FE Analytics
Andrew Courtney, an analyst at QuotedData, suggested a key part of the decision to merge with Alliance Trust may well have been performance.
“[It] is likely in response to Witan’s ongoing poor performance with the trust one of the sector’s worst performers over the past 10 years,” he said.
“The deal with Alliance appears to be a good fit on first blush, given the similarities of the two funds – both are large global funds with multi-manager approaches – and is certainly a positive for both in our view given the benefits of increased efficiency that the combination will bring.”
On the news, shares in Alliance Trust nudged 0.7% higher in Wednesday morning trading, while Witan’s shares jumped 3.3%.
Samir Shah, fund research analyst at Quilter Cheviot, said the deal was “a positive move for both sets of shareholders”.
For those wishing to sell, however, around 17.5% of Witan’s shares will be eligible to be redeemed in cash at a price of 97.5% of the net asset value of the trust, with the remainder rolled into newly issued Alliance Trust shares.
“Both boards should also be recognised for their efforts including offering Witan’s shareholders an opportunity to tender their shares and for introducing measures to increase Alliance Trust’s yield to match Witan’s and maintain their AIC dividend hero status,” added Shah.
Dean Buckley, chairman of Alliance Trust, said the move was a “significant moment” for the investment management industry and represents a “key milestone in the history of the investment trust structure”.
Andrew Ross, chairman of Witan, added: “The companies share similar cultures and a mutual desire to provide a ‘one stop shop’ for retail investors in global equities.”