Questor: Keep a keen eye on this investment trust about to hit the FTSE 100
Consolidation in the fragmented £273bn investment trust sector has taken a decisive turn with two of the biggest listed global funds held by private investors agreeing to merge.
Witan, a £1.6bn investment trust named after the advisory council that served Anglo-Saxon kings, has agreed to combine with Alliance Trust, its £3.4bn arch-rival based in Dundee in the largest merger of its kind in the UK.
After 100 years on the London Stock Exchange, Witan will wind up, its assets transferred to Alliance which will issue new shares to Witan shareholders by October.
Both trusts take a “multi-manager” approach, employing between six and 10 external fund managers to run the bulk of their assets. It is hoped the new Alliance Witan, as the merged company will be called, will be a more effective “one-stop shop”, providing investors all the equity exposure they need in one place.
With a market value of around £5bn, Alliance Witan should gain promotion to the FTSE 100 index of top UK listed companies, putting it just behind F&C, the UK’s oldest investment trust, and some way below US hedge fund Pershing Square, fellow global equities trust Scottish Mortgage and private equity giant 3i Group.
Elevation to the FTSE 100 will raise Alliance Witan’s profile and make its shares easier and cheaper to trade as the company taps a deeper pool of investors.
Both sets of shareholders will also benefit from a cut in management fees which should reduce total ongoing charges to under 0.6pc a year compared to Witan’s current 0.76pc and 0.62pc for Alliance.
Willis Towers Watson (WTW), Alliance Trust’s investment adviser, will contribute around £7.5m to ensure its shareholders are not burdened with merger costs. Witan is funding its expenses through a tender offer that will enable its shareholders to sell 17.5pc of their shares for 2.5pc less than their underlying net asset value (Nav).
Given the shares stand on a 6pc discount to Nav, that’s an attractive offer, although Witan shareholders might have expected a bigger exit of around 25pc. However, that might have jeopardised Alliance Witan’s chances of securing FTSE membership.
Andrew Ross, Witan’s chairman, was “delighted” at the deal which, he said “allows the continuation of our multi-manager approach at lower fees and in a larger, more liquid vehicle”.
Alliance has agreed to raise its dividends to ensure investors in the slightly higher-yielding Witan do not see a drop in income. Both funds are “dividend heroes”, having grown their annual payouts by 56 years and 50 years respectively, so are anxious to avoid cuts in distributions.
Nevertheless, for Witan this transaction is an admission of defeat. The decision to roll into Alliance Trust followed a strategic review prompted by the planned retirement of Andrew Bell, former chief executive, who strengthened its investment strategy after taking over in 2011.
Unfortunately, Witan’s performance was badly hit after Bell mis-timed a shift to growth fund managers who suffered in the 2021-22 sell-off. Returns were also weakened by a big holding in the GMO Climate Change fund, similarly knocked in the growth crash as interest rates and inflation rose, as were its holdings in other investment companies.
Consequently, it was overtaken by Alliance Trust, which hired WTW seven years ago to follow in Witan’s footsteps. After a slow start, its team led by Craig Baker, chief investment officer, proved more adept at navigating the shifts in world stock markets. Lately the portfolio has benefited from its panel of fund managers having a bigger weighting to the buoyant US market and large Magnificent Seven tech stocks such as Google-owner Alphabet and chip maker Nvidia.
Since April 2017 when Alliance changed its mandate, it has grown its assets by nearly 102pc, or 10.2pc a year, trouncing Witan’s underlying investment return of 60.6pc, or 6.8pc a year. However, Alliance has not met its stretching target of beating the MSCI World index by 2pc a year over three-year periods with its returns since the changeover merely matching the benchmark.
Nevertheless, this is an historic achievement for Alliance, which before its conversion to a multi-manager fund, was a poor performer that looked like becoming a takeover target itself after losing a bruising battle with hedge fund activist Elliott Management.
Alliance is well placed now to play a significant role in the retail investment market. Witan shareholders should be confident about the merger and other investors should put Alliance Witan on their watch lists. A weakening in the share price before or after the transaction completes could provide a good buying opportunity.
Questor says: hold Alliance Trust
Ticker: ATST
Share price at close: £12.10
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website https://citywire.com/investment-trust-insider
