- A blockbuster deal hits the investment trust market
- Lower fees and continued dividend records will keep shareholders happy
- Potential for a turnaround in performance for Witan shareholders
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“This is a blockbuster merger of two of the biggest and oldest names in the investment trust world. The deal will result in lower annual charges for investors, as well as preserving the long dividend track records of both trusts. The share price of both trusts rose on the back of the news, especially Witan, which suggests the market thinks the deal provides decent value to both sets of shareholders. The new combined trust will be called Alliance Witan.
“The £5 billion merger will probably catapult Alliance Witan into the FTSE 100, where it will sit alongside global competitors F&C Investment Trust and Scottish Mortgage. Inclusion in the FTSE 100 is likely to increase liquidity and visibility for Alliance Witan, though most passive funds tracking the UK stock market follow the FTSE All Share, and most active funds eschew investment trusts, so we shouldn’t expect this to be a total gamechanger. Scale is likely to be the greater driver of liquidity, with institutional investors and pension funds feeling more comfortable dabbling in a larger vehicle, because they can make a meaningful investment without owning too much of the trust.
Why the deal is happening
“There has been a great deal of consolidation in the investment trust industry, driven by high discounts and falling asset values. But that’s not what’s going on here; both these trusts have significant assets and are big enough to keep ploughing their own furrows if they so wished.
“The announced retirement of Andrew Bell, fund manager of the Witan trust, appears to have been a critical catalyst for the merger. The search for a successor led the Witan board to the deal with Alliance Trust. This may have been to preserve the investment approach, seeing as single-strategy multi-manager funds like Alliance Trust and Witan are a rare breed nowadays, largely displaced by risk-rated multi-asset funds. The alternative to a multi-manager approach for Witan would have been a single manager running a global portfolio of equities, which would have been a considerable departure from the existing investment strategy for Witan shareholders.
“The new vehicle will follow the existing investment strategy of Alliance Trust rather than Witan, hardly surprising seeing as the lead manager of Witan is retiring. Willis Towers Watson have also done a good job at steadying the Alliance Trust ship and delivering outperformance since they were handed the mandate in 2017.
“The Alliance investment strategy is unusual, picking active fund managers but then asking them to provide ten to twenty of their best ideas for inclusion in the portfolio. A more conventional multi-manager approach is to give the chosen fund managers a lump of money to run themselves, which would typically result in a portfolio of over 40 stocks per fund manager. Those with longer memories might remember this approach being pioneered in the UK funds market by Skandia, with the launch of the Skandia Global Best Ideas fund in 2006.
“Willis Towers Watson have successfully implemented the best ideas approach at Alliance Trust, and since taking over in 2017 have outperformed the MSCI World Index by 8.5 percentage points on an NAV basis (to the 31 March 2024). That’s a rather pleasing result which has been matched by few active managers, against a backdrop of big tech stocks dominating market returns.
Implications for investment strategy and shareholders
“Alliance Trust says there will be no change to the investment strategy, though it will be interesting to see if the implementation of that strategy shifts, in particular whether the roster of managers expands beyond the current stable of ten stock pickers, to spread the risk and liquidity of a larger pool of assets.
“One of the benefits of the deal for both sets of shareholders will be lower annual management fees, expected to come at a basis point ratio in the high 50s. In other words somewhere between 0.55% per annum and 0.6% per annum. The ongoing charge for the average actively managed global fund is 0.91%, according to AJ Bell’s latest Manager versus Machine report. So it’s no mean feat for Alliance Witan to be able to a offer a global trust enveloping the expertise of both Willis Towers Watson and the underlying regional fund managers for under 0.6% per annum, though it still won’t be quite as cheap as kindred behemoths F&C and Scottish Mortgage.
“For Alliance Trust shareholders the investment strategy continues as expected, with no dilution to NAV and lower annual charges, so there would seem to be little to ponder about continuing to invest.
“For Witan investors there is also a lower annual management fee and the potential for a turnaround in performance after a fallow few years. But while there are similarities in the investment approach, they are by no means identical, so Witan shareholders will need to mull over whether the new combined trust is up their alley. If not, they are being offered a cash exit at a little below NAV, though this may be scaled back depending on demand.
“Shareholders can expect to receive detailed proposals in the post by the end of August, with a vote in September, and the transaction completed in September or October.”
