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Henderson High Income and Threadneedle UK Select plan merger

Threadneedle UK Select Trust plans to merge with Henderson High Income Trust
April 12, 2017

Henderson High Income Trust (HHI) and Threadneedle UK Select Trust (UKT) are proposing a merger, subject to shareholder approval at meetings in June.

Threadneedle UK Select proposes winding up and giving its shareholders the option to take cash or receive new shares in Henderson High Income. Threadneedle UK Select's board said the £50m UK All Companies sector trust was unable to continue due to its small size and difficulties in reducing its discount to net asset value (NAV). Following a "beauty parade" selection process of potential merger candidates its board selected Henderson High Income, which has assets of over £200m.

Up until the announcement, Threadneedle UK Select had been trading at a 12-month average discount to NAV of 13 per cent and 8.7 per cent average over three years. As of 5 April 2017, the discount had tightened to 2.6 per cent. Despite the relatively wide discount the trust has beaten its benchmark, the FTSE All-Share, over one, three and five years.

Henderson High Income, which is managed by David Smith, also has a good performance record and offers an attractive yield of 4.8 per cent. As a result it has consistently traded at a premium to net asset value (NAV). Before the merger plans were announced, the premium averaged at 1.95 per cent over three years and 0.86 per cent over 12 months. It was trading at a 3 per cent premium to NAV as of 5 April.

Henderson High Income's ongoing charge plus performance fee of 1.42 per cent, meanwhile, is lower than Threadneedle UK Select's 1.94 per cent.

"We are pleased to be able to recommend a merger with Henderson High Income Trust," says David Warr, chairman of Threadneedle UK Select Trust. "We recognise the importance for shareholders of scale and liquidity for their investment, and the appeal of an investment in a successor trust that offers an attractive dividend yield and a premium to NAV."

Threadneedle UK Select shareholders who opt for cash will be able to do so at close to NAV. Those who roll over into Henderson High Income will receive ordinary shares at no premium to that trust's NAV. If shareholders don't state a preference for either option they will be automatically rolled over into Henderson High Income.

Threadneedle UK Select shareholders who opt for Henderson High Income shares will not qualify for dividends declared before the rollover, notably the second interim dividend due in late July.

The estimated costs of the proposed merger to be borne by Threadneedle UK Select shareholders are 0.5 per cent of its NAV, excluding the liquidator's retention and any portfolio disposal costs.

If the merger is approved, Henderson Global Investors will contribute a sum equivalent to 18 months of Henderson High Income's base management fee of 0.5 per cent a year on the total assets that roll over from Threadneedle UK Select. This is so the new shares issued to those that roll into Henderson High Income can be issued at a nil premium to NAV.

Henderson High Income's board will also set up a 12-month share issuance programme so it can offer further new shares at a small premium to NAV, with an initial offer at a premium of 1 per cent.

Ewan Lovett-Turner, director of investment companies research at Numis Securities, says: "The proposals make sense to us given that Threadneedle UK Select is sub-scale. Threadneedle UK Select shareholders that roll over and Henderson High Income shareholders should benefit from being in a larger vehicle with increased trading liquidity and lower costs. And the contribution to costs from Henderson means that Threadneedle UK Select shareholders would not pay a premium to roll over while existing Henderson High Income shareholders would not bear the costs of the proposals."

But Threadneedle UK Select shareholders should bear in mind that Henderson High Income has much higher gearing (debt) than Threadneedle UK Select - 24 per cent in contrast to 3 per cent.

"Henderson High Income is a good trust and has had good performance," says David Liddell, chief executive of online investment service IpsoFacto Investor. "But the cost of its debt could go up if interest rates rise. Although 20-odd per cent is not a huge amount of gearing, it does make it a slightly different animal to Threadneedle UK Select. Shareholders should perhaps ask themselves whether this is the time to be moving into a more geared trust."

 

HHI and UKT performance

Fund/benchmark1-year share price return (%)3-year cumulative share price return (%)5-year cumulative share price return (%)
Threadneedle UK Select Trust332899
Henderson High Income Trust202792
UK Equity & Bond Income sector average202067
UK All Companies sector average191975
FTSE All Share Index222361

Source: Winterflood Securities as at 05/04/17

 

Henderson High Income Trust (HHI)
PRICE193pNET GEARING24%
AIC SECTOR UK Equity & Bond IncomeNAV187.3p
FUND TYPEInvestment trustPREMIUM TO NAV3%
MARKET CAP£216mYIELD4.8%
No OF HOLDINGS97*ONGOING CHARGE1.42%**
SET UP DATE

11/01/1989

MORE DETAILSwww.henderson.com
MANAGER START DATE

02/01/2014

  

Source: Winterflood Securities as at 05/04/17, *Henderson Global Investors as at 28/02/17, **Source: Association of Investment Companies

 

Threadneedle UK Select Trust (UKT)
PRICE210pNET GEARING3%
AIC SECTOR UK All CompaniesNAV215p
FUND TYPEInvestment trustDISCOUNT TO NAV2.6%
MARKET CAP£47mYIELD2.2%
No OF HOLDINGS63*ONGOING CHARGE1.94%
SET-UP DATE

03/01/1959*

MORE DETAILSwww.columbiathreadneedle.co.uk
MANAGER START DATE

03/09/2014

  

Source: Winterflood Securities as at 05/04/17, *Columbia Threadneedle as at 28/02/17

 

Henderson High Income Top 10 Holdings as at 28/02/17

British American Tobacco4.3
Royal Dutch Shell 3.4
AstraZeneca3.4
Diageo 3.2
HSBC Holdings 2.7
BP2.6
Imperial Brands2.6
Lloyds Banking Group 2.6
Standard Life2.4
Vodafone Group2.3

Source: Henderson Global Investors

 

Threadneedle UK Select Top 10 Holdings as at 28/02/17

GlaxoSmithKline4.3
Royal Dutch Shell 3.7
Unilever 3.6
Imperial Brands 3.5
Prudential3.4
AstraZeneca3.3
British American Tobacco 3.0
Legal & General Group 3.0
Diageo2.8
BT Group 2.7

Source: Columbia Threadneedle

 

Threadneedle UK Select Sector breakdown as at 28/02/17

Consumer Goods22.3
Financials20.3
Consumer Services17.0
Industrials15.7
Healthcare9.1
Oil & Gas6.3
Basic Materials4.0
Technology3.0
Telecommunications2.7
Utilities0.0
Cash-0.5

Source: Columbia Threadneedle