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Two investment trusts have agreed to merge their portfolios in an attempt to cut costs and increase liquidity, as the sector struggles with deep share price discounts.
The FTSE 250 £1bn Fidelity China Special Situations trust will absorb the assets of Abrdn’s China Investment Company. The deal will create a £1.2bn trust that will continue to be managed by Fidelity and portfolio manager Dale Nicholls, the companies said in a statement on Tuesday.
Investment trusts have been bulking up in a bid to prop up their share prices, which are trading just shy of the discounts seen at the end of 2008 owing to a combination of higher interest rates and a change to rules covering the way fees are reported.
Those changes have dented trusts’ appeal to investors and prompted warnings that the sector may disappear without government or regulatory action.
The Abrdn trust said: “The board [has] long been working on ways to address . . . the persistent discount at which its shares trade . . . it has become clear that the consensus [among shareholders] is for a merger with Fidelity China with the option of a partial cash exit.”
Abrdn’s trust is trading at an 18.3 per cent discount to its net asset value, and the Fidelity trust is at a 9.7 per cent discount. Both trusts said the merger would lead to cost efficiencies and result in lower charges for shareholders, as well as increased liquidity.
Another merger, between Troy Asset Management’s Income & Growth Trust and STS Global Income & Growth Trust, was also announced on Tuesday.
Investment trusts are publicly listed companies, with four of them, including the £12.1bn Scottish Mortgage Investment Trust, in the FTSE 100. They invest in companies and assets on behalf of investors, and are overseen by a board of directors.
Trusts have historically been a popular vehicle among retail investors, but recent updates to reporting rules over fees has made them appear more expensive than other investments, according to critics.
Trusts were classified as alternative investment funds under EU regulation introduced in 2013. They later became subject to Europe’s Mifid II rules, which required wealth and fund managers to aggregate fund costs and present them as one number to their client, as a percentage of NAV.
The new rules artificially inflate the cost of investment trusts, which are already factored into trusts’ share prices, said Ben Conway, head of fund management at Hawksmoor Investment Management.
“It is misleading as you do not buy the NAV [of an investment trust], you buy the share price. The role of the share price is to discount those ongoing costs,” he said.
Critics say the reporting change prompted investors to sell their holdings in investment trusts at a time when higher interest rates have also dented their appeal in some cases. Trusts in sectors such as commercial property have been hurt as investors have moved their money into bonds as yields have increased.
The average discount of share price to net asset value for trusts hit 16.9 per cent at the end of October this year, narrowly below the 17.7 per cent discount recorded at the end of 2008, according to data from the Association of Investment Companies.
The discounts have led to fund managers, wealth managers and peers to call for a change in the way investment trust fees are reported to investors.
“This is damaging to London as an investment case . . . we could lose a third of the FTSE 100,” said Baroness Bowles of Berkhamsted, who is supporting a private members’ bill tackling the issue introduced in the House of Lords by Baroness Altmann.
Last week the government said the UK financial regulator was considering “interim solutions” to mitigate the impact of cost disclosures on the investment trust sector while the government looks to implement a long-term legislative solution.
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