The proposed merger between Witan investment trust (WTAN) and Alliance Trust ATST) is “not unexpected” and “makes sense” amid myriad headwinds for the investment company sector, according to analysts. But while benefits including lower costs, greater liquidity and “increased efficiencies” are welcome, question marks remain as to the 8% of Witan’s portfolio which is invested in other trusts.
This morning (26 June), the boards of both trusts announced that Witan’s assets will be rolled into Alliance Trust, creating a vehicle with net assets of approximately £5bn. This will make the proposed merger the single largest trust merger to have taken place in the UK.
Should the deal get the green light, the merger will complete between September and October this year, when the new shares for Alliance Witan will be issued.
The combination will take place via a scheme of reconstruction by Witan, while WTAN’s shareholders will be able to opt for a cash exit at 97.5% of NAV minus costs – subject to a 17.5% limit on shares held.
The merger will also lead to a lower management fee structure for the trust, as well as an OCF below 60 basis points. Currently, Witan and Alliance Trust’s OCFs stand at 76 and 62 basis points, respectively.
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Andrew Courtney, investment analyst at QuotedData, said that while the move is “not unexpected” given the retirement of Witan CEO Andrew Bell, the announcement “remains a significant one”.
“The deal with Alliance appears to be a good fit on first blush, given the similarities of the two funds – both are large global funds with multi-manager approaches – and is certainly a positive for both in our view given the benefits of increased efficiency that the combination will bring.”
Dan Cartridge, fund manager at Hawksmoor Investment Management, said he can “see the benefits of the merger”. “The investment trust sector has been facing material headwinds in recent years with cost disclosure issues, outflows from the UK market, and the consolidation of the wealth management industry. This is creating a need for lower cost, larger and more liquid vehicles which the combined entity will create.
“We are also a fan of having a cash out option and Witan shareholders have the option to get around 18% of their investment back in cash, helping to reduce the supply of paper and potentially help narrow the discount of the combined entity (alongside increased demand that FTSE 100 inclusion would bring).”
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Emma Bird, head of investment trusts research at Winterflood, agreed the offer of a cash exit for Witan shareholders is “best practice”, but pointed out that some shareholders “may have wanted a bigger exit opportunity” than 17.5% given the size of both trusts.
However, she added: “We think that the combination of WTAN and ATST makes sense and is not a great surprise given the recent announcement by WTAN that it was reviewing its management arrangements and the similarities between the two funds’ investment approaches, with both being multi-manager global equity funds.
“The contribution from WTW should mean that ATST shareholders suffer no cost dilution as a result of the transaction, while they will also benefit from a larger, more liquid, higher profile, lower cost vehicle, enhanced by the reduced management fee.”
Iain Scouller, analyst at Stifel, added that the increased scale of the investment company offers the benefits that come with being a “larger, more liquid company”. However, he highlighted the trust’s potential FTSE 100 inclusion could be a “double-edged sword”.
“We think the share price of FTSE 100 companies can be quite highly influenced by ‘basket trades’ and other index activity, which can increase share price volatility of FTSE 100 constituents,” he warned.
Performance uplift for Witan
A key benefit for Witan shareholders, according to analysts, will be the performance tailwind from ATST. Managed by Willis Tower Watson, the latter has achieved a total return of 29.6% over the last three years, outperforming the MSCI ACWI index by approximately 100 basis points over the period, according to data from FE Fundinfo. In contrast, Witan has returned 16.6%, although both vehicles have comfortably beaten the average peer’s three-year gain of 5%. According to AIC data, ATST is trading on a 5.6% discount to its net asset value, while Witan is trading on a discount of 7.8%.
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Thomas McMahon, head of investment companies research at Kepler Partners, said: “ATST has an impressive track record, having outperformed global equity indices over a difficult period, with multiple style gyrations. This is what the process is designed to do, so it is clearly great proof of concept for the manager.
“The combined portfolio should continue to offer an attractive way to invest in equities over the long run which should appeal to retail investors who want to buy and forget. The larger size should improve liquidity and also allow long-term institutional shareholders to take a position.”
QuotedData’s Courtney added: “Witan shareholders will also benefit from Willis Towers Watson’s approach that has driven ATST’s superior performance as well as the 5% discount level that ATST defends.”
Stifel’s Scouller said one of the main drivers of Alliance’s higher returns has been its exposure to the Magnificent Seven companies, which comprise approximately 15% of its portfolio at present – almost double that of Witan’s at 9%. “We think the future performance of the Mag Seven companies will have an important influence on the returns of the combined trust,” he reasoned.
Courtney goes as far to say the merger is “likely in response to Witan’s ongoing poor performance”, pointing out the investment company is “one of the worst performers over the last 10 years”. Over the last decade, Witan has returned 134.5%, compared to the IT Global sector average’s total return of 149.6, and the MSCI ACWI’s gains of 202.9%.
‘Some work to do’
While analysts are largely supportive of the proposed merger, they point out that there could be some complications afoot.
Hawksmoor’s Cartridge said: “Where we’re a bit more concerned is that Witan has around 8% of its portfolio invested in other investment trusts, which will need to be sold (not immediately, but ultimately that will be the direction of travel).
“So, while good in one regard, it will also reduce demand for some very good existing investment trusts across private equity, property and infrastructure at a time when discounts in these areas are already very wide.”
Kepler’s McMahon agreed, adding: “In the short-to-medium term, there will be some work to do in selling the old Witan portfolio, in particular some less liquid investment trust shareholdings. This will have some associated costs, although the plan to avoid any deadlines for selling should afford flexibility in getting the best deal for shareholders.”
‘The bottom line’
Considering all aspects of the proposed merger, Darius McDermott, managing director at FundCalibre, said: “The bottom line is the Alliance Trust has achieved better performance than Witan, so it will benefit Witans shareholders from that perspective. The combined entity will have a lower fee, which is a move in the right direction.
“They are both big trusts already but there may be some benefit of a larger combined entity, although that is not initially obvious.”
Kamal Warraich, head of fund research at Canaccord Genuity Wealth Management, said the merger “looks to be appropriate given the relatively similar approach and shared characteristics” of both trusts. “We are also favourable on prospects for enhanced liquidity and the potential for decreased fees given the benefits of scale.”
Scouller said Stifel has upgraded Alliance Trust from ‘neutral’ to a ‘positive’ rating, and has downgraded Witan to ‘neutral’ from ‘positive’: “We thought a Witan/Alliance combination was quite a likely outcome of Witan’s strategic review. We view it as the best-fit outcome, given these two trusts have a relatively unique multi-manager approach to investment.
“This merger makes sense for shareholders and is a logical outcome of the review process.”
