Alliance Trust: Combination with Witan could produce a FTSE 100 giant

ATST’s combination with WTAN could produce a FTSE 100 giant…by Jean-Baptise Andrieux

Overview

Alliance Trust (ATST) has delivered a robust track record of performance during a difficult environment for active managers in recent years. Thanks to its success and the attractions of the sophisticated investment strategy, it is set to absorb the majority of the assets of Witan (WTAN) following the retirement of the latter’s manager. The boards of both trusts have agreed to terms on a merger, which should deliver substantial advantages to the shareholders of Alliance Witan (should shareholders of both trusts approve the deal).

Alliance Witan is expected to have net assets of c. £4.8bn after the deal, the exact amount depending on the take-up of the 17.5% cash offer by WTAN shareholders. This will make it one of the largest investment trusts in the market, with a significant media profile, which should help with marketing and liquidity. Indeed, FTSE 100 inclusion is a real prospect in time.

A lower management fee has been agreed, and along with economies of scale this should see the ongoing charges figure fall to the high 50s in basis points terms, lower than both ATST’s and WTAN’s current OCFs and below average for the AIC Global sector. Importantly, the deal has been designed to have no cost to ATST shareholders, with WTAN making a contribution to the expenses. The votes will be held on 01/10/2024.

The new trust would have a higher dividend, in line with WTAN’s latest payout, and the intention is to grow this year-on-year. ATST’s investment process will remain identical, with the managers continuing to implement the strategy that has performed strongly over five years, delivering an attractive return profile in varying conditions (see Performance).

During this period, the trust’s Discount has also been stable, with the board proactive in repurchasing shares. At the time of writing, ATST is trading at a 5.9% discount.

Analyst’s View

In our view, the combination of ATST and WTAN is a positive development, as it will create a more liquid entity, which may qualify for inclusion in the FTSE 100, with lower ongoing fees and paying a higher dividend. The tried and tested management strategy will remain, with the Willis Towers Watson team given more capital to manage to its distinctive approach. We note there may be a slight change to the line-up of managers, as ATST might add one or two stock pickers from WTAN, but fundamentally the strategy will remain the same, with the team balancing factor exposures against the index while aiming to outperform through high conviction stock selection.

We think this is a highly attractive strategy for a core holding in global equities, and will only become more relevant to a wider range of investors in a larger vehicle. The last five years have seen the aftermath of the Russian invasion of Ukraine, a huge surge in inflation, and the emergence of AI amongst other events. Markets have been volatile, with styles coming into and out of favour, yet ATST has performed well, outperforming over the whole period while never having a terrible period relative to the index. ATST’s approach has certainly proven its worth, in our view, and the decision of the WTAN board to seek a combination makes sense. It is good to see that the costs of the transaction for ATST shareholders will be covered, and they will also enjoy an immediate hike to the dividend and the prospects for this to grow year-on-year from a higher level.

Bull

• Combination with WTAN will improve liquidity
• Lower charges and increased dividend if the combination goes through
• Is likely to adapt to different market environments

Bear

• May underperform in stylistically driven markets
• As a core holding, ATST is highly correlated to the benchmark
• Gearing can exacerbate performance on both the upside and downside

See the latest research note on Alliance Trust here >

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