One of the oldest investment trusts proposes merger

If given the green light by shareholders, the trust will merge with a JP Morgan trust and change its approach. 

The board of Scottish Investment Trust (LSE:SCIN), the self-managed company established in 1887, has proposed a merger with JPMorgan Global Growth & Income (LSE:JGGI).

The proposed merger, which is subject to shareholder approval at both trusts, could see assets swell to £1.2 billion. Scottish Investment Trust has £680 million of assets, while JPMorgan Global Growth & Income has £735 million. Both invest in global companies.

The proposed merger would give Scottish Investment Trust shareholders a 4% dividend policy and mean a change in investment approach. The fund charge will remain low, at 0.57% for the next 12 months.

If viewed positively by the market, a reduction in Scottish Investment Trust’s discount, which stood at 12.8% prior to the merger announcement, could play out. The trust’s share price has so far responded positively, rising 8% since the news. 

JPMorgan Global Growth & Income, which coincidentally was also established in 1887, is ‘style agonistic’ through holding a mixture of growth and value shares. Timothy Woodhouse, a co-manager, appeared on interactive investor’s Funds Fan podcast earlier this month.

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Scottish Investment Trust, which has been managed by Alasdair McKinnon since summer 2014, invests in value companies. Among the companies it backs are ‘ugly ducklings’ – unloved shares with the potential to surprise on the upside.

The trust’s performance has been lacklustre, and in June triggered a board announcement of a review into management arrangements. Over three and five years, both its net asset value (NAV) return and share price total return have hugely underperformed rivals. Over five years, for example, Scottish Investment Trust’s share price return is 19.3% versus 83.4% for the average global trust, according to figures from FE Analytics.

Over five years, JPMorgan Global Growth & Income has returned 109.3% in share price total return terms, outpacing the 61.6% return for the average trust in its sector (global equity income).

The management change, if given the green light by shareholders, is expected to take effect by mid-January 2022.

James Will, chair of Scottish Investment Trust, said: “The board undertook a lengthy and robust review process and considered a wide range of options for the company. Ultimately, the proposal to combine Scottish Investment Trust with JPMorgan Global Growth & Income was considered the most compelling outcome for shareholders, allowing for the creation of a company with an enlarged net asset base of in excess of £1.2 billion.”

The latest sign of boards becoming more proactive?

The investment trust industry has faced criticism from various commentators and analysts over the years for having too many small, sub-standard trusts.

This is starting to change, with boards becoming increasingly proactive, whether through replacing an underperforming fund manager or fund management group, changing the trust’s strategy to broaden its appeal, or winding up the trust altogether.

Investment trust mergers are rare, although there has been an increase lately. Winterflood, the investment trust analyst, points out that four mergers have taken place since the start of 2020 and three proposed mergers (including Scottish Investment Trust) have been announced. A high-profile example last year was the board of Mark Barnett’s former Perpetual Income and Growth trust opting to merge the company with Murray Income Trust (LSE:MUT).

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When it comes to merging or winding up an investment trust, boards are voting themselves out of a job, which leads to potential reluctance. Interestingly, in the case of Scottish Investment Trust, it was announced that the board will keep its position in the enlarged JP Morgan Global Growth & Income.

Investment trust analysts have welcomed the proposed merger. Numis’ Priyesh Parmar noted: “We have been calling for more consolidation in the sector and this combination plays to that theme, leading to a vehicle with significant scale, and represents a bolder decision from the board than simply appointing another manager.

“JPMorgan is a ‘safe pair of hands’, being an established manager in the investment companies sector and has the resources to promote the trust.”

Winterflood pointed out that the small, but growing number of mergers in recent years have often “been triggered by performance issues, with the advantage of creating larger, more liquid vehicles and more competitive cost bases”.

In regards to Scottish Investment Trust, the analyst noted that it had “struggled for some time and the team’s value, contrarian investment approach has proven a significant headwind to performance”.

The analyst continued: “Despite an impressive marketing effort that presented the trust as the ugly duckling of the sector, the simple truth was that Scottish Investment Trust was eating itself, buying back 39% of its share capital worth £310 million since the start of 2015.”

Winterflood added that the proposed merger is a “positive development for JP Morgan, shareholders in both Scottish Investment Trust and JP Morgan Global Growth & Income, and the sector in general”.