Interactive Investor

Fidelity China Special Situations to benefit from merger with rival

The merger is part of a growing trend of consolidation and takeover activity in the investment trust industry, reports Kyle Caldwell.

28th November 2023 10:57

Kyle Caldwell from interactive investor

abrdn China Investment Company (LSE:ACIC) will merge with rival Fidelity China Special Situations (LSE:FCSS) to address its “over-concentrated” shareholder register.

If given the green light by both sets of shareholders, Fidelity China Special Situations will see its assets swell to £1.2 billion, up from around £1 billion at present. With more assets on board, Fidelity China Special Situations will pass on economies of scale to investors by having a lower ongoing charges figure.

Shareholders in abrdn China will be offered a cash exit opportunity if they do not wish to roll over to Fidelity China Special Situations. This cash exit will be up to 33% of the abrdn shares in issue, at a 2% discount to formula asset value per ordinary share.

abrdn China will be wound up, with its cash and assets transferred to the Fidelity trust.

Helen Green, chair of abrdn China Investment Company Limited, said: “After a very thorough review process, including consultation with the company’s major shareholders, the board has concluded that the best practicable option to address the company’s over-concentrated register and to provide significantly improved liquidity to our shareholders is to merge with Fidelity China Special Situations, which is both sizeable and the clear leader in the China investment company sector.”

The trust, one of interactive investor’s Super 60 investment ideas, will continue to have the same investment objective and be managed by Dale Nicholls. Through investing in both listed and unlisted businesses, the trust seeks to profit from the rise of the middle class in China and the shift towards a more consumption-driven economy. Nicholls has managed the trust for nearly a decade (from 1 April 2014), taking over from Anthony Bolton following his retirement from fund management.

Mike Balfour, chair of Fidelity China Special Situations, said that the merger will create “an enlarged vehicle with additional liquidity, cementing the company’s status as the leading constituent of the China Investment Company sector. It also helps spread costs over a larger base of assets, thereby reducing the ongoing charges for both new and existing shareholders.”

The merger is part of a growing trend of consolidation and takeover activity in the investment trust industry. One of the drivers is wide discounts, with the average investment company on a discount of around -15%, which is its widest level since the global financial crisis.

Another big factor at play is consolidation in the wealth management industry, which has led to a small number of players with large amounts of assets. In turn, the minimum size for a wealth management firm to invest in an investment trust continues to increase, with those holding less than £300 million in assets deemed subscale.

Abrdn is combining abrdn New Dawn and Asia Dragon, while CT Property accepted an offer in the spring from LondonMetric Property (LSE:LMP), and Industrials REIT has been bought by private equity group BlackStone.

Another merger announced today involves Troy Income & Growth (LSE:TIGT), which will roll over assets into STS Global Income & Growth Trust (LSE:STS). Under the proposals, the enlarged trust will benefit from an increase in scale, resulting in lower fees for shareholders. 

In a recent On The Money podcast episode, the growing trend of consolidation in the investment trust industry was one of the topics discussed with investment trust buyer Nick Greenwood, who manages MIGO Opportunities Trust (LSE:MIGO).

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