Earlier this week the board of the Independent Investment Trust (IIT) announced plans to merge the company with Baillie Gifford’s Monks Investment Trust (MNKS) – writes Jayna Rana

 
IIT’s shareholders can opt for a full cash realisation or choose to have their money rolled over into Monks (so would not be subject to capital gains tax), which follows similar investment objectives but with a more diversified portfolio. We thought this was an elegant solution to the situation.

While this case is relatively straightforward and comes in response to IIT manager Max Ward’s retirement, there have also been instances where a trust has been forced to reassess its relevance in a continuously changing market environment, which can lead to a merger or even closure.

We have said this in the past and we still believe that this is just one of the many great features of the investment trust model. It allows boards to focus on what’s best for shareholders and for lack of a better phrase, sorts the wheat from the chaff.

Smaller trusts with lacklustre performance may look up to a bigger and better version of themselves while ‘generalist’ mandates that have struggled to attract new demand may find joining forces with another may be the only way to survive.

For example, Scottish Investment Trust (SCIN) is close to finalising its merger with JPMorgan Global Growth & Income (JGGI), with the latter being the continuing company. During the transition period, SCIN has taken on a policy mirroring that of JGGI. We viewed this as a good outcome for SCIN shareholders.

Meanwhile, mergers can also reflect the need for larger and more liquid vehicles. In June, property funds Shaftesbury (SHB) and Capital & Countries (CAPC) reached an agreement on a £3.5bn all-share merger. This particular transaction had been rumoured for years before finally being confirmed in May this year.

Earlier this year, LXi REIT (LXi) merged with Secure Income REIT (SIR), an AIM listed non-AIC member company, whose shareholders were given the option to receive 3.32 LXI REIT shares for every 1 share held or a cash exit.

At the time, Cyrus Ardalan, chairman of LXI, said that in today’s investment climate “security and resilience of cash flows, scale and liquidity, underpinned by clear and compelling strategic direction and cost efficiency are essential components of successful REITs”.

The combined group meant a strengthened position to benefit from significant future growth opportunities to enhance total shareholder returns.

Unfortunately, there have also been cases where market conditions and a lack of rollover options have forced otherwise good offerings to shut their doors permanently.

In March this year, the board of Jupiter Emerging & Frontier Income (JEFI) concluded it would be in its shareholders’ best interests to liquidate the company. The trust had shrunk through redemptions and limited opportunities for growth against the backdrop of a deteriorating international outlook (made worse by the Russian-Ukrainian conflict).

While not a surprise, we thought this was disappointing. JEFI offered a distinctly different investment proposition – a combination of income and capital growth from a portfolio of emerging and frontier market securities; a decent yield (the highest in the sector); and, ignoring the single country funds, provided a return during the last three years that is close to twice the sector median.

We would have liked to see a rollover into another investment company offered but unfortunately, every single emerging market investment company was – and still is – trading on a discount, and so it made sense for investors to take their cash and reinvest it in the market.

ScotGems faced a similar challenge in May after its AIFM First Sentier stepped down. It has now realised 91% of the trust’s portfolio.

Consolidation isn’t a bad thing. It can stop what might otherwise be a painful process in its tracks before causing further damage to investments and it can also make room for more exciting and relevant opportunities.
 
economic and political review
 





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