The Board of BlackRock Income Strategies has completed its strategic review and has agreed heads of terms with Aberdeen Asset Management and Aberdeen UK Tracker Trust (AUKT) to propose the following changes:
- Appointing Aberdeen’s Diversified Multi-Asset team, with Mike Brooks and Tony Foster as new lead portfolio managers;
- Significantly enlarging the company by a merger with AUKT;
- renaming the newly combined company Aberdeen Diversified Income and Growth Trust (ADIGT);
- Managing ADIGT under a diversified multi-asset strategy with a change in investment objective to target returns of LIBOR+5.5 per cent. per annum (net of fees) over rolling five-year periods;
- Revising the dividend policy to include a reduction in the current dividend level that recognises the current low yield environment; and
- Replacing the current zero discount policy with a more flexible approach that recognises the constraints imposed by gearing and by the more illiquid nature of the future portfolio.
As part of the overall changes, they will also be making a tender offer for up to 20 per cent. of the shares in issue at a tender price equal to NAV (cum income, debt at fair value) less 4 per cent. and the costs and expenses of the tender offer. The tender offer will be subject to shareholder approval and inter-conditional on shareholder approval of the change in investment objective and policy and the merger.
New manager
Aberdeen Fund Managers Limited will be the combined fund’s AIFM, conditional on relevant regulatory approvals and finalisation of the terms of the formal management agreement. They’ll persevere with the multi-asset investment strategy which will be managed by Aberdeen’s Diversified Multi-Asset team.
The new lead portfolio managers will be Mike Brooks and Tony Foster. Mike Brooks is the Head of Aberdeen’s Diversified Multi-Asset team and is the co-lead manager of the Aberdeen Diversified Growth Fund. Mike joined Aberdeen in 2015 from Baillie Gifford and has 22 years of investment experience. Tony Foster is a Senior Investment Manager in the Diversified Multi-Asset team and joined Aberdeen in 2014 following the acquisition of Scottish Widows Investment Partnership.
Aberdeen’s appointment will become effective upon termination of the existing management arrangements with BlackRock Fund Managers Limited, which has been served protective notice. An announcement of the termination date is expected to be made in January 2017.
Aberdeen will be paid an annual management fee of 0.5 per cent. of net assets up to GBP300 million and 0.45 per cent. on the net assets above GBP300 million. This contrasts with the existing annual management fee of 0.4 per cent., payable on gross assets.
The merger
The Board has agreed a merger with AUKT to be effected by way of a scheme of reconstruction under Section 110 of the Insolvency Act 1986 and a voluntary winding up of AUKT.
AUKT qualifying shareholders will be able to elect to receive new shares in ADIGT and therefore an exposure to a multi-asset strategy and/or cash. The cash exit offered to AUKT shareholders as part of the scheme will be limited to 40 per cent. of the AUKT shares in issue. The Formula Asset Value of the new ADIGT shares will be calculated on the basis of NAV (cum income, debt at fair value) as at the calculation date less the costs of the scheme (as reduced by the contribution from Aberdeen as set out below). AUKT is expected to transfer a portfolio of cash and cash equivalent investments to ADIGT under the scheme.
The Boards of BIST and AUKT have agreed that the Board of ADIGT will comprise four directors from the current Board of BIST and three directors from the current Board of AUKT. James Long will continue as Chairman and Kevin Ingram (current Chairman of AUKT) will become the Senior Independent Director of ADIGT. Lynn Ruddick and Jimmy West have agreed to not stand for re-election at the next BIST annual general meeting, subject to shareholder approval of the scheme.
The merger is conditional on regulatory and tax approvals being obtained and will be subject to approval by both BIST shareholders and AUKT shareholders. Each company will pay for its own costs of implementing the scheme. Aberdeen has agreed to make a contribution to BIST in relation to its costs of implementing the scheme, thereby significantly reducing the costs of the scheme for existing BIST shareholders.
Amended Investment Objective and Policy
The new investment objective is to target returns of LIBOR+5.5 per cent. per annum (net of fees) over rolling five-year periods. Alongside the change in investment objective, the Board will also adopt a new investment policy, which targets a truly diversified multi-asset approach to generating highly attractive long-term income and capital returns. The focus of ADIGT will be on delivering greater capital stability over the medium term than a long-only equity strategy and with volatility significantly less than that of equities. The portfolio will include, but is not limited to, listed and unquoted equities, property, social and renewable infrastructure, emerging market bonds, loans, asset-backed securities, insurance linked securities, private equity, farmland and aircraft leasing. This builds on the experience and success of Mike Brooks and Tony Foster with similar open-ended portfolios but with the added benefit of being able to access, in an unconstrained approach, the entire asset class spectrum utilising the closed-end structure to its best advantage. It also fully harnesses the breadth and depth of Aberdeen’s resources across a wide range of traditional and alternative asset classes, through a simple and transparent approach.
The proposed changes to the investment objective and policy are subject to FCA approval and approval by BIST shareholders.
Dividend Policy
The intention is to pay an interim dividend of at least 1.635 pence in respect of the quarter ending 31 December 2016 (a dividend of 1.635 pence was paid for the quarter ended 31 December 2015). In addition, the Board intends to declare a further dividend for the period from 1 January 2017 to the date of the implementation of the scheme, before the scheme becomes effective and thereafter to reduce the subsequent quarterly dividends by an amount equivalent to an annualised cut in the dividend level of approximately 20 per cent.
In line with good corporate governance the Board will continue to put the Company’s dividend policy forward for shareholder approval at its annual general meetings.
Tender Offer
They will propose a tender offer for up to 20 per cent. of its ordinary shares in issue (excluding any shares in treasury) at a tender price equal to NAV (cum income, debt at fair value) less 4 per cent. and the costs and expenses of the tender offer. The tender offer will be subject to shareholder approval and inter-conditional on shareholder approval of the change in investment objective and policy and the merger.
Discount Control Policy
The bought back 7.6m shares over the year to the end of September 2016 under the old zero discount policy. The Board has decided to drop this. Where appropriate the Board will consider implementing share buybacks to provide liquidity to shareholders from time to time and other forms of discount control deemed to be appropriate at that time, taking into account the more illiquid underlying portfolio mix.
Gearing
The existing 6.25 per cent. bonds 2031 will stay.
Aviva Investors are going to support the scheme. Documents will be sent to shareholders with the Annual Report and Accounts and notice of Annual General Meeting in January 2017. The General Meeting to approve the proposals is expected to be convened in March 2017.
James Long, Chairman, commented: “The Board is disappointed with the performance for shareholders over the past 19 months. The negative absolute returns delivered, coupled with our concerns over the sustainability of the dividend in the current low yield environment, led us to initiate the strategic review that we have now concluded. Our comprehensive review has re-affirmed our conviction that a well-managed multi-asset portfolio within an investment trust structure is an attractive proposition for shareholders and is highly relevant in the pensions and savings market.
We believe that the appointment of Aberdeen, with its proven multi-asset and promotion capabilities, the restructured investment portfolio designed to deliver an attractive investment objective and dividend policy and the enhanced scale of your Company as a result of the merger will make your re-shaped Company a distinctive, relevant and strong proposition for both sets of shareholders and for future investors.
We very much look forward to working with Aberdeen to deliver the performance that shareholders have a right to expect“.
BIST / AUKT : BlackRock Income Strategies and Aberdeen UK Tracker to merge