Fidelity Emerging Markets (FEML) has agreed to buy back the 25.7% legacy stake held by Strathclyde Pension Fund at a price 14% below net asset value (NAV).
Given the £548m investment trust stands on about a 10% discount, that should lead to a 4% uplift to NAV per share, which analysts welcomed.
On a poor day for the UK stock market, with the FTSE 100 falling 0.8%, the shares firmed 0.4% to 858.75p,
The repurchase of the stake that the £31bn local authority pension scheme bought when Genesis Investment Management ran the trust before Fidelity took over in 2021 requires shareholder approval at a general meeting.
Major shareholders, which include leading value investors City of London Investment Management, Allspring and Lazard, have indicated their support for a deal that avoids a hit to the share price if Strathclyde sought to sell on the open market.
The transaction comes a year before the company faces its first five-year continuation vote with a 25% tender offer if investment performance has underperformed its benchmark over five years.
Figures from the company show that under the latest three years of Fidelity’s management there has been a total underlying return of 37.8%, ahead of the 24.1% gain in the MSCI Emerging Markets index.
However, broker Winterflood pointed out that the growth in net asset value since Fidelity’s arrival lagged the benchmark by about 6%, which is the result of the writedown in its Russia holdings after the 2022 invasion of Ukraine. If that persists it would trigger the tender offer and shrink the trust by a quarter.
Our view
James Carthew, head of investment company research at QuotedData, said: “This agreement for the repurchase of Strathclyde’s stake in FEML works well for ongoing shareholders and it seems unlikely that it will be opposed. The removal of a potential overhang could help the rating but City of London’s 29% stake was already large and now looks unwieldy rising to 39% after the transaction. Good performance has helped bring in the discount (it is already number one in NAV terms over three years), the one-off benefit from the buyback will help propel FEML to the top of the leaderboard over one year, too. I have been saying for a while that the weakening dollar could mean that now is emerging markets time to shine. City of London may end up being able to sell some of its stake to new investors.”
Concentrated register
Analysts said the trust’s board could face further action or pressure given the concentrated shareholder register of potentially activist investors. Saba Capital, the US hedge fund that challenged the boards of seven investment companies in the New Year, disclosed a 5.7% stake in April 2024 which would mechanically increase following the buyout of Strathclyde’s shares.
Winterflood analyst Alex Trett said: “While City of London will be unable to make further active purchases, its holding could still rise passively without triggering takeover requirements.”
Ewan Lovett-Turner, head of investment company research at Deutsche Numis, said: “We calculate Allspring’s stake will increase to mid-teens, whilst Lazard stake may be similar (albeit this is based on a 2024 holdings announcement). This gives a small group of shareholders significant power to determine the future of the company.”
