- Wealth managers’ ‘buy lists’ are hard to access for small investment trusts
- Discounts mean they cannot raise capital, driving an increase in M&A activity
A vicious cycle of fewer clients and hefty discounts is pushing smaller investment trusts to merge or wind-up, cutting options for retail buyers. Wealth managers are often big investors in investment trusts, and increasingly look for bigger vehicles that they can trade at scale. But their numbers are coming down.
The merger between Rathbones (RAT) and Investec Wealth & Investment announced earlier this year reflects a wider trend in the industry, with both listed and unlisted companies affected.
James Thom, lead manager of the Abrdn New Dawn Investment Trust (ABD), said that consolidation in the wealth management sector has led to ”a drive for bigger trusts that can sit on buy lists and comfortably absorb flows”.
Later this year, Abrdn New Dawn is due to merge into Asia Dragon Trust (DGN), another Asian equity trust also managed by Abrdn. The two have a similar focus on quality companies and considerable portfolio overlap, with a common holdings score of 63 per cent, so there was a logic in putting them together, Thom said. The strategy will remain very similar, although the merged Asia Dragon trust will also seek to invest more widely across the Asia-Pacific region, keeping some of Abrdn New Dawn’s current holdings, and fees will be reduced.
Abrdn New Dawn is trading at a discount of 10.7 per cent and Asia Dragon on 16.1 per cent. Thom hoped the merger would help get the shares closer to NAV by boosting demand. “Greater scale and greater liquidity should bring in more buyers and shareholders. You'll have a more diversified shareholder register too,” he said.
The bid to create one bigger, more liquid trust that could appeal to wealth managers was one of the factors at play in the decision to merge. “If you want to be on a [big wealth manager’s] buy list, you are going to have to clear a certain level of liquidity and size,” Thom noted. He argued that this would drive more M&A activity across the sector – although he added that there's still a place for small and niche investment trusts.
Increased M&A activity
Various Abrdn-run trusts have been the protagonists of mergers, wind-downs and strategic reviews recently. Abrdn Latin American Income, which only had £35mn in net assets, wound up earlier this year. Abrdn Japan (AJIT), together with Atlantis Japan Growth (AJG) is set to roll its assets into Nippon Active Value (NAVF); Abrdn Smaller Companies Income (ASCI) is merging into Shires Income (SHRS); and Abrdn Diversified Income & Growth (ADIG) is undergoing a strategic review and considering various proposals, after buybacks failed to narrow the discount to the board's satisfaction.
Dan Cartridge, assistant fund manager at Hawksmoor Fund Managers, said Abrdn stood out for the number of similar trusts it manages, but added that more firms should be considering mergers and closures. “We think the rationalisation they have been doing is excellent and is the blueprint for any firm running multiple trusts,” he said. Ultimately, the decision is in the hands of the boards, but investment firms do have influence over this.
Cartridge agreed that consolidation among wealth managers, including the Rathbones-Investec deal, were a key driver of M&A activity in the investment trust sector. “The traditional owners of investment trusts can no longer own some of the smaller trusts, so any trust that is subscale and on a discount, which means it can't raise more capital, should be looking at M&A to boost the liquidity profile,” he said. Mergers can also result in lower fees, which are more attractive for multi-asset managers since regulations require them to disclose underlying costs.
The vast majority of investment trusts are currently trading at a discount due to a drop in demand, with the average discount for the Association of Investment Companies’ universe standing at 14.4 per cent as of 11 September. This is driven by a mix of factors, including competition from fixed-income assets paying higher yields than in the past, negative sentiment towards certain asset classes and in some cases poor performance.
Not always straightforward
Abrdn’s trusts are not the only ones reviewing their options, with Ecofin US Renewables (RNEW) the latest to announce a strategic review focused on the sale of the assets. Smaller trusts trading at discounts remain likely M&A targets, including in the infrastructure and property sectors, where institutional investors such as pension funds could be tempted to snap up some of these assets on the cheap. Earlier this week, Ediston Property Investment Company (EPIC) confirmed it has agreed to sell its portfolio to US-listed real estate investment trust Realty Income.
But merger negotiations are not always successful, particularly between trusts investing in alternatives, where they can be complicated by the nature of the assets themselves. The board of RM Infrastructure Income (RMII) demonstrated this last week, by proposing the wind-down of the trust rather than a merger with GCP Infrastructure (GCP).
GCP was also trading at a chunky discount, there was no explicit cash exit expected for investors and the deal was only meant to be for a portion of RMII’s assets, all of which made a merger difficult. “To the casual observer, a merger of funds in the same sector seems like an obvious option, but the ending of discussions between RM Infrastructure Income and GCP Infrastructure highlights that the technicalities of this often make it more difficult to achieve,” Numis analysts wrote.
