Aberdeen Standard Investment’s experience repositioning a fund formerly run by Neil Woodford could have helped cinch it a deal to take over Mark Barnett’s former Perpetual Income and Growth fund, which will now merge with the Murray Income Trust.
On Wednesday, the Perpetual Income and Growth board announced it had made the “rare” decision to merge the investment trust with a rival UK equity income product rather than appointing a new manager to run it as a standalone mandate. Perpetual Income and Growth shares have rallied 6.5% on the announcement.
The £580.9m Murray Income Trust is set to more than double in size when it merges with Perpetual Income and Growth, which holds £642.2m. It would therefore be one of the largest trusts in the AIC UK Equity Income sector after the £1.8bn Finsbury Growth and Income trust and the £1.6bn City of London trust.
Murray Income manager Charles Luke (pictured) already has experience repositioning the Woodford Income Focus fund, which ASI took on in February. Woodford had been a mentor to Barnett when the pair worked at Invesco and continued to share many crossholdings even after Woodford launched his own boutique.
The Perpetual Income and Growth board announced it was dumping Barnett as fund manager in April, a month before his exit from Invesco. He had already been dropped from the Edinburgh Investment Trust in December and been replaced by Majedie Asset Management CIO James de Uphaugh.
See also: Invesco denies trust sackings and unquoted write downs led to Mark Barnett exit
ASI pitched strongly for board to decide on rare merger
“Merging the investment trust is not something done too often or indeed a decision taken lightly,” said Willis Owen head of personal investing Adrian Lowcock. “That suggests the pitch from Charles Luke and ASI was very strong.”
Lowcock said ASI’s experience repositioning Woodford Income Focus would have given them specific expertise that may have been appealing to the board. ASI may also have been able to highlight any crossholdings between Woodford Income Focus and Perpetual Income and Growth that Luke was now familiar with due to that experience.
The Perpetual Income and Growth board highlighted the strength of the ASI pitch in its regulatory filing announcing the merger. It highlighted that beauty parades “rarely” result in consolidation with another investment trust.
Only 14 investment trust mergers have taken place since 2008, according to Association of Investment Companies data. The merger of Gartmore Growth Opportunities and Artemis Alpha is one of the few examples of a beauty parade resulting in a merger rather than a new manager to run the existing mandate.
Perpetual Income and Growth shareholders will have the option of a cash exit for up to 20% of Perpetual Income and Growth shares.
The merger means three board members will step down once it completes, which is set to take place in Q4. Chairman Richard Laing, as well as Alan Giles and Georgina Field, will join the Murray Income board, which will temporarily have nine members until its next AGM.
See also: ASI duo throws shade at Woodford as revamped holdings revealed
Who benefits from the merger?
Tilney managing director Jason Hollands said Woodford Income Focus and Perpetual Income and Growth were both managed with an unconstrained approach and value bias.
“The ASI UK equity team also taken an unconstrained approach but have a less dogmatic style bias, with both quality and valuation metrics used,” Hollands added. “Importantly, it is very much a team based approach and not a star manager culture at ASI, which might offer some comfort to investors in these portfolios after a turbulent run.”
Numis thought a shift to more quality companies would not upset Perpetual Income and Growth investors given recent underperformance. “We do not view the approach as a large deviation from what the existing strategy was aiming for,” said investment companies research director Ewan Lovett-Turner.
Numis said it was “refreshing” to see a board opt for a merger. “We believe it is positive for the investment companies sector to see a merger, particularly of funds already of reasonable size to create a vehicle that has the potential scale to appear to institutional investors and retail platforms,” said Lovett-Turner.
Murray Income Trust had not been the most liquid investment trust but previous investment trust mergers suggest this could change, Lovett-Turner said. “Standard Life UK Smaller Companies saw an over 50% increase in trading liquidity follow the merger with Dunedin Smaller Companies, compared to the combined liquidity of the two vehicles, whilst Diverse Income saw an over 40% increase in trading volume.”
JP Morgan Cazenove reckoned both investment trusts would benefit from the move.
It said Perpetual Income and Growth shareholders would benefit because it would result in an immediate uplift. It was trading at a discount of 15.2% on Tuesday, which has since narrowed to around 9%, while Murray Income was trading at a 4.9% discount.
Murray Income investors will benefit because more assets mean management fees will drop to 0.38%, leading to an estimated ongoing charge of 0.5% compared to 0.62% currently.
