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BIST and AUKT plan merger into new multi-asset trust

Aberdeen UK Tracker Trust and BlackRock Income Strategies Trust are proposing a merger
December 8, 2016

Aberdeen UK Tracker Trust (AUKT) BlackRock Income Strategies Trust (BIST) are proposing a merger that would create a new multi-asset investment trust, subject to shareholder approval at meetings in February and March next year. The merger would be the second manager and mandate change in as many years for BIST, which was formerly called British Assets Trust. BIST's board is ending its management contract with current manager BlackRock due to poor performance.

"The negative absolute returns delivered, coupled with our concerns over the sustainability of the dividend in the current low yield environment, led us to initiate the strategic review that we have now concluded," said James Long, chairman of BIST. "We believe that the appointment of Aberdeen, with its proven multi-asset and promotion capabilities, the restructured investment portfolio designed to deliver an attractive investment objective and dividend policy, and the enhanced scale of [BIST] as a result of the merger will make the reshaped company a distinctive, relevant and strong proposition for both sets of shareholders and future investors."

AUKT is the only UK equities tracking fund with an investment trust structure. Its board said appetite for the trust has waned as investors are opting for lower-cost tracker funds such as exchange traded funds (ETFs) and open-ended tracker funds. AUKT has an ongoing charge of 0.29 per cent, which is far higher than many other FTSE All-Share trackers. Vanguard FTSE UK All Share Index Unit Trust (GB00B3X7QG63), for example, has an ongoing charge of just 0.08 per cent while HSBC FTSE All Share Index Fund (GB00B80QFX11) is even lower at 0.07 per cent.

If the merger goes ahead the new vehicle will be called Aberdeen Diversified Income & Growth Trust and target returns of Libor+5.5 per cent a year, net of fees, over a five-year period. But the trust's quarterly dividend will be approximately 20 per cent lower than BIST's current dividend. According to broker Numis Securities, this suggests a quarterly payout of 5.2p a year, equivalent to a yield of 4.8 per cent at BIST's current share price.

BIST would make a tender offer for existing shareholders of up to 20 per cent of the shares in issue at a price equal to net asset value (NAV), less 4 per cent and the costs involved. BIST was trading at a 14.5 per cent discount to NAV as at 7 December.

The annual management fee of the merged vehicle would be 0.5 per cent of net assets up to £300m and 0.45 per cent above £300m. This compares with BIST's existing fee of 0.4 per cent a year payable on gross assets. BIST currently has an ongoing charge of 0.69 per cent.

AUKT shareholders would receive new shares in the merged trust and/or cash. Investors who opted for the latter would receive cash equivalent to their shares at a 2.75 per cent discount to the trust's NAV. As of 7 December AUKT was trading at a 6.4 per cent discount to NAV. However, the cash exit offer will be limited to 40 per cent of AUKT's shares.

David Liddell, chief executive of online investment service IpsoFacto Investor, said investors might be disappointed by the early change of BIST's mandate. He suggested BIST shareholders may want to hold on to the investment for the time being, depending on their income requirements. "If you don't mind the income cuts there's probably no harm in holding on because the downside shouldn't be that much in terms of the discount widening and you can tender part of your holding."

AUKT shareholders, meanwhile, need to be aware that the new trust would have a totally different investment profile to the existing tracker fund.

"The new trust is going to be diversified across different geographies and asset classes, so it's a completely different animal," said Mr Liddell. "[AUKT shareholders have] a choice of holding for the time being and hoping they can sell all of their holding at the tender offer at a discount of 2.75 per cent, or selling now at a discount of around 6 per cent. It depends if they want the new trust as part of their exposure."