Invesco is to merge its Invesco Income & Growth trust (IVI), the last of its UK equity income closed-ended vehicles, to tackle its widening discount as investor demand fizzles.
On Tuesday the board announced it had struck an agreement to merge IVI with the Invesco Perpetual Select Trust by way of a scheme reconstruction. The move will see IVI’s £155.4m of assets combined with the IP’s Select’s UK Equity Share Portfolio which has £43m.
IVI manager Ciaran Mallon will move across to manage the merged fund, which will bear the IP Select moniker, taking over from current manager James Goldstone who has managed the UK share class since October 2016.
As such, IP Select UK Equity Share Portfolio’s investment objective and policy will change to reflect IVI’s and will have very similar holdings to its current portfolio.
Invesco Income & Growth sees discount widen to 14%
IVI is the last of Invesco’s dedicated UK Equity Income trusts. Over the last year the Henley-based fund group has seen both its Edinburgh Investment Trust and Perpetual Income & Growth mandates ripped away after both suffered performance slumps under Mark Barnett who exited Invesco in May. The Edinburgh trust was handed to Majedie, while Aberdeen Standard Investments scooped up Perpetual Income & Growth, merging it with its own Murray Income trust.
IVI’s fate had been up in the air since January when the board gave into shareholder pressure for a continuation vote after its share price remained in the doldrums due to a lack of investor demand.
At the end of its financial year ending 30 March 2020 IVI shares were trading 12.6% below net asset value but since then the discount has widened further to 13.9%, according to data from the Association of Investment Companies. The average UK Equity Income discount is –1.3% by contrast.
But at the trust’s AGM on 10 September only one fifth of shareholders voted in favour of winding up the trust, while 79.4% backed a resolution that Mallon’s investment company should carry on.
Merger looks like ‘shutting the stable door after the horse has bolted’
Numis Securities said it was generally supportive of “subscale” fund mergers, noting that size and trading liquidity have become increasingly important to grab investors’ attention.
But it added the merger of IVI and IP Select UK Equity Share Portfolio looks like “shutting the stable door after the horse has bolted”.
“We welcome funds seeking to make themselves more relevant, either through an increase in size or differentiating their investment strategy,” it said in an analyst note. “However, we believe that a combination of two relatively small funds/share classes may not be sufficient to put the fund on the radar of many investors.”
While trusts with assets below £100m were considered small historically, Numis said the threshold to attract demand has “risen significantly” with most investors focusing on investment companies with market caps of at least £200m.
“Assuming a full take up of the tender, the net assets will be c.£155m, meaning that the share class would remain of a similar size to the current level and it unclear to us whether there would be a meaningful pick-up in trading liquidity,” it said.
Performance needs to turn around
In order to stimulate demand Numis said Invesco would need to step up its marketing efforts and that the trust would need to establish a period of good performance.
Year-to-date IVI has slumped 16%, worse than the IT UK Equity Income sector’s losses of 12.5% and the FTSE All Share’s returns of -13.2%. IP Select UK Equity Share Portfolio, which sits in the IT UK All Companies sector, has fallen 11.7% over the same period.
IVI shareholders will have the option to rollover into the IP Select UK Equity share class, without triggering capital gains tax, or realise a proportion of their holding for cash.
The proposals are subject to approval by the shareholders of both companies in addition to regulatory and tax approvals.
