Dunedin Smaller Companies Investment Trust (DNDL) is planning a merger with Standard Life UK Smaller Companies Trust (SLS). If shareholders agree to the proposal, the combined entity will be run by highly regarded small-caps manager Harry Nimmo, using his current investment approach which involves finding quality high-growth opportunities.
Dunedin Smaller Companies' board proposed a merger after conducting a strategic review of the trust and its position in the UK smaller companies sector. The board's reasons for doing this include the trust's relatively small size and lack of secondary market liquidity, which it said was making it difficult to attract new investors.
The day before the announcement of the merger plans on 21 June, the trust had a market capitalisation of £137m and was trading at a discount to net asset value (NAV) of 14.1 per cent. By contrast, Standard Life UK Smaller Companies had a market capitalisation of £378m and was trading at a discount to NAV of 6.1 per cent. It has a discount control policy whereby it buys back shares to try to limit its discount to NAV to no wider than 8 per cent.
And while over three and five years Dunedin Smaller Companies has made NAV returns of 43 and 94 per cent, respectively, Standard Life UK Smaller Companies has returned 73 and 113 per cent.
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) |
| Dunedin Smaller Companies NAV | 20 | 43 | 94 |
| Dunedin Smaller Companies share price | 26 | 42 | 77 |
| Standard Life UK Smaller Companies NAV | 21 | 73 | 113 |
| Standard Life UK Smaller Companies share price | 20 | 73 | 101 |
| UK - Small Cap average | 15 | 44 | 102 |
| FTSE Small Cap excluding investment companies index | 8 | 34 | 83 |
| Numis Smaller Companies plus AIM excluding investment companies | 7 | 30 | 75 |
| Source: Winterflood Securities as at 21/06/18 |
Between the announcement of the plans for the merger on 21 June and 26 June, Dunedin Smaller Companies' discount to NAV tightened significantly to 7.3 per cent and its market capitalisation increased to £147m, according to Winterflood Securities.
Dunedin Smaller Companies' board said: "[The merger will] provide the company's shareholders with an investment in a significantly larger investment trust, with a strong investment track record, a stronger rating, a robust discount control mechanism and substantially greater secondary market liquidity, all of which should appeal to a broader range of investors."
The proposed tie-up between the trusts follows last year's merger of the management groups that run the two vehicles, Aberdeen Asset Management and Standard Life Investments. Dunedin Smaller Companies' board said that the creation of Standard Life Aberdeen had resulted in the trust "being managed alongside one with a very similar UK smaller companies mandate".
Investment trust analysts think a merger would benefit both trusts' shareholders.
Standard Life UK Smaller Companies has a tiered management fee so an increase in assets should lead to a fee cut. Analysts at broker Numis Securities estimate that its management fee would fall from 0.77 to 0.73 per cent of gross assets and lower its ongoing charge, which is currently 1.08 per cent.
Sam Murphy, associate director of investment companies research at Numis Securities, added: "Somewhat unusually, there is no opportunity to exit for cash, which may disappoint some Dunedin shareholders. But for shareholders who do not wish to retain their holding, liquidity should be provided by Standard Life UK Smaller Companies' discount control mechanism, which aims to protect an 8 per cent discount to NAV."
If the merger goes ahead it is expected to complete in September. It will involve the voluntary liquidation of Dunedin Smaller Companies and a rollover of its assets into Standard Life UK Smaller Companies, with new shares issued to Dunedin shareholders. The merger will be conducted on a NAV for NAV basis, and the costs of the transaction will be borne by Dunedin's shareholders. The expected costs will be published in a forthcoming circular.
Before the merger, Dunedin's board will declare a final half-year dividend, which is expected to be equivalent to the reduction in dividends for its shareholders during the 12 months after the merger. Dunedin Smaller Companies has a yield of 2.2 per cent while Standard Life UK Smaller Companies yields 1.3 per cent.
"The dividend is a slight issue, but the yield is only 2 per cent, so even though you are talking a 50 per cent cut in the dividend, it's not like it's a cut from a 4 per cent yield," said David Liddell, chief executive of online investment service IpsoFacto Investor. "I wouldn't expect that many shareholders hold the trust for the income [at that yield level], and I think most would [be pleased to] swap the income for the improved performance. Those that are worried about the dividend will be able to sell at a reduced discount to NAV."
