James Crux, Shares Magazine, 5 September 2024:
Eight months in, 2024 is already a record year for M&A (mergers and acquisitions) in the investment trust sector.
Trust boards are increasingly focused on value for money and shareholder returns amid persistently wide discounts to NAV (net asset value) and with activists nosing around..
The investment trust sector faces some structural headwinds to demand which explain these stubbornly wide discounts. These include the rise of tracker funds, retail investors pulling in their horns due to cost of living pressures, not to mention the misleading cost disclosures casting a pall over sentiment towards closed-ended funds..
A consequence of smaller trusts combining with rivals or winding-up is that some good strategies will go to the wall in this process of creative destruction, but larger vehicles should be more liquid and reduce trading costs, and have scope to spend more on marketing, thereby gathering more assets and creating a virtuous cycle of growth.
This new landscape of investment trust giants has many positives, but there are also negatives for investors to be aware of.
THE URGE TO MERGE
The current spate of mergers is justified by calls for fewer, larger trusts from a dramatically consolidated wealth management sector, together with increased focus on costs. A merger can be a silver bullet for addressing a persistent discount, because combining two or more smaller trusts creates a single vehicle offering superior liquidity and economies of scale.
James Carthew, head of investment companies at QuotedData, says one justification for mergers is that the big wealth managers, who are themselves consolidating, ‘have to write such big tickets that they cannot contemplate investing in small funds for fear of dominating share registers.
‘That is a valid argument but the minimum size that they will accept has risen rapidly from a couple of hundred million a few years ago to a billion or more today.’
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