'Ballsy' is not a word often used in the investment trust space, but it's one that might just apply to the latest proposal from Ashoka WhiteOak Emerging Markets (AWEM).
The trust, which launched just last year and comes with a trifling £35mn market capitalisation, has put forward the idea of it effectively taking over its much larger rival, the £651mn Asia Dragon (DGN).
With trusts often tending to absorb rivals that are smaller or of a similar size, this would be an unusual move. However it does have some merit: the Ashoka team points to the fact that its portfolio returns have been strong since the trust listed, whereas Asia Dragon has struggled in recent years.
AWEM shares have tended to trade on a narrower discount than DGN's, and the Ashoka process, which centres on stockpicking and fees that hinge entirely on whether the trust outperforms, does stand out from the competition. That process has worked well so far for stablemate Ashoka India Equity (AIE). The Ashoka WhiteOak Emerging Markets trust, meanwhile, has a 55 per cent overlap with the Asia Dragon portfolio, and nine of DGN's top 10 holdings can be found in the AWEM portfolio.
The AWEM board says that shareholders controlling some 56 per cent of Asia Dragon's voting rights would be "supportive in principle" of the tie-up, although at the time of writing the Asia Dragon board had not responded to the proposal, bar to acknowledge it and urge shareholders not to take any action just yet. It's also worth noting that Asia Dragon shareholders who don't wish to take part in the proposed tie-up would be able to get out at or close to net asset value (NAV) via a cash exit, which would be capped at 50 per cent.
We have previously made the case that mergers can be a good way to create trusts that are larger, more liquid and come with better returns, or at least past performance. And such a proposal is an encouraging thing, even if it would mean more disruption for shareholders who have already seen Asia Dragon undertake one merger in the past year.
Such mergers do mean we end up favouring yesterday's winners and can reduce the variety on offer in the trust space, but there are still plenty of Asian and emerging market trusts and funds out there with different approaches.
With discounts still wide and mergers an option in plenty of sectors, could we see more cases of upstart minnows looking to gobble up much larger rivals?
UK small-cap vehicle Onward Opportunities (ONWD) also only launched last year, but lags several of its peers by share price total return so seems an unlikely option to take over a struggling rival. Elsewhere, other relatively new trusts have already expanded, be it via strong returns, issuance or mergers – Japanese small-cap fund Nippon Active Value (NAVF) stands out as one example here.
In the private equity sector, a relatively young and strongly performing name, Literacy Capital (BOOK), has already achieved a market cap of £310mn. As such, it's more likely we'll continue to see large and successful trusts, rather than minnows, swallowing up peers.
