Some high-profile deals like the merger of Perpetual Income & Growth with Murray Income in late 2020 were well-received and captured investor attention. Since then, investment trust mergers have really taken off with nineteen completed since 2021 in comparison to just five mergers in the five previous years. So why are investment trust mergers having a moment and what are the benefits for shareholders?

Mergers have come to the fore since the pandemic. In challenging conditions – a high inflation, high interest rate environment, and with wars in Ukraine and the Middle East – boards have been proactively working to meet shareholders’ needs. For some, this has meant buying back shares, but others have taken the more radical step of merging with another investment trust or even winding up the company. Boards are aware that mergers have generally been well-received by shareholders and there are a lot of reasons why this is the case.

Mergers are usually attractive to shareholders because they are keen to invest in larger, more liquid investment trusts. This helps shareholders trade larger amounts of shares easily, without impacting the share price. Merged trusts sometimes have lower charges, which is clearly an advantage for shareholders, as well as the potential for better performance.

Another benefit is that bigger merged trusts may appeal to a wider range of shareholders. For example, large wealth managers tend to invest in trusts which are bigger and more liquid. Recently a number of wealth management groups have merged and grown in size, and bigger trusts can appeal to them. For instance, the merger of the wealth managers Investec and Rathbones last year created Rathbones Group which has a considerable £100 billion of assets under management.

The theory behind investment trusts mergers is appealing but let’s take a look at some examples. Last year in November abrdn New Dawn Investment Trust merged with Asia Dragon Trust. The newly merged trust now has £749 million of assets and the chair of Asia Dragon Trust, James Will, explained that: "The merger created an entity with significantly greater scale through the bringing together of two trusts with a similar investment approach and management style and the same investment manager while also providing the Company with greater investment flexibility. We took the opportunity to extend the investment mandate to include Australasia.”

Most importantly, James explained the advantages for shareholders: “The key benefits were seen to be improved liquidity in the Company's shares and a lower ongoing charges ratio, further benefiting from the tiered fee structure and reduced management fee arrangements. The enlarged Company was of sufficient size to enter the FTSE 250 and also allowed abrdn to focus its marketing efforts on one all-cap growth trust in the Asia Pacific (ex-Japan) sector, rather than two; all of which has the potential to broaden investor interest in the Company over time.”

In December, abrdn Smaller Companies Income merged with Shires Income. The merged entity, Shires Income, has £125 million of assets and is now managed by Charles Luke and Iain Pyle. Shareholders of the merged trust benefitted from a bigger company, a higher yield (6%) and a fall in the ongoing charges. They will also continue to have access to UK smaller companies, with the trust aiming to have 20% exposure in the future.

It’s early days for these mergers and their outcome must be judged over the longer term. Of course, there’s room for smaller investment trusts – a smaller size is particularly suitable for specialist areas like microcaps and bigger is not always better. However, the advantages of investment trust mergers for shareholders are easy to understand and explain why this merger moment for investment trusts is likely to continue for a while.

Important information

Risk factors you should consider prior to investing:

  • The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
  • Past performance is not a guide to future results.
  • Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
  • There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
  • As with all stock exchange investments the value of the Trust shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
  • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
  • The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
  • Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
  • The Company may charge expenses to capital which may erode the capital value of the investment.
  • The Alternative Investment Market (AIM) is a flexible, international market that offers small and growing companies the benefits of trading on a world-class public market within a regulatory environment designed specifically for them. AIM is owned and operated by the London Stock Exchange. Companies that trade on AIM may be harder to buy and sell than larger companies and their share prices may move up and down very sharply because they have lower trading volumes and also because of the nature of the companies themselves. In times of economic difficulty, companies listed on AIM could fail altogether and you could lose all your money.
  • The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
  • Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
  • Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher-than-average risk of loss.
  • Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.