Group hoping to roll second alliance and alliance trust into single multi-manager offering
Advance UK Trust, the closed-end funds arbitrageur, has put forward the idea that Scottish generalist investment trusts create a single multi-manager structure through a series of friendly mergers.
The idea follows the ejection of the £571.2m Second Alliance Trust from the FTSE All-Share and FTSE Mid 250 indices on liquidity grounds.
Because of its ejection, index tracking funds are selling shares in the trust, which remains listed on the stock market, and, because it is illiquid, the price is dropping.
James Carthew, investment director and manager at Advance UK, said: 'A gap of over 4% has opened up between the valuation of the Second Alliance and Alliance Trust. This is curious because the two trusts are almost identical. They have the same directors and very similar portfolios.
'If Second Alliance had share buy-back powers it could buy in the loose stock and arrest the share decline as well as enhancing its NAV. However, there is a more imaginative solution that avoids the need to shrink the company ' merge the two.'
The proposed trust, already christened Scottish Alliance, would be a multi-manager product. Advance UK then envisages the board of the super trust, giving individual fund groups the contract to run mandates in individual geographical areas or asset classes, similar to the way that pension fund trustees divide up a scheme's assets.
Carthew said: 'Shareholders would benefit from the increased liquidity, across to the best investment managers from across the industry and we believe the new trust would trade at or below asset value, reflecting its high profile and its membership of the FTSE index.'
Carthew said that not only would this raise the profile of Second Alliance and drag back in the index trackers, it would save on expenses as well. He said an agreed deal between the trusts would not cost much, and the combined company would still be smaller than the Foreign & Colonial Investment Trust.
Trusts mentioned by Advance which should consider joining the super trust also include the Scottish Investment Trust, Scottish Mortgage, Monks, Martin Currie Portfolio, British Assets, Murray International and Edinburgh Worldwide. Advance has written to the chairman of each of the trusts explaining the idea, asking them to discuss it with their fellow directors.
Carthew said: 'The biggest barriers to consolidation in the sector are the fund management houses who are worried about losing revenue and the boards who are worried about losing their jobs. We believe that a series of friendly mergers of the Scottish generalists could create a champion for the industry.'
Charles Cade, analyst at HSBC, said: 'In our view, some consolidation within the investment trust sector would be a positive step.
'However, a merger between two trusts, run by the same management group, is usually difficult to achieve due to differences between both the shareholders and the boards of the two companies. This suggests that a friendly merger of funds across management groups is likely to prove unworkable.'
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