Record year for takeovers in investment trust world

The once sleepy world of investment trusts is now in overdrive. London’s listed funds are having a record-breaking year, with unprecedented levels of mergers, takeovers and buybacks.
Two of Britain’s oldest investment trusts joined forces this summer when Alliance Trust and its rival Witan Investment Trust merged to create a £5 billion giant.
This was among 14 mergers in the investment trust space in 2024 and two more are agreed. At the start of 2023 there were 327 investment companies, excluding venture capital trusts. This number stood at 299 at the end of September.
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This rapid fall comes as retail investors increasingly turn to the far cheaper world of passive investing and ETFs (exchange-traded funds) and there is some worry that the dwindling number of listed funds signals a more existential threat for investment trusts. On the other hand, fewer, bigger, more efficient funds could be just the ticket for an industry that has been largely out of favour over the past two years.
Higher interest rates and financial pressure on retail investors, who historically have been key buyers in the industry, have hit demand for the sector. Shares in most investment trusts now trade well below their net asset value, at an average discount of 15.1 per cent, excluding the private equity outlier 3i.
Consolidation could help to close this gap as bigger, cheaper funds become more attractive to small and institutional investors. Ewan Lovett-Turner, an investment trust analyst at the broker Deutsche Numis, noted that consolidation in another sector — wealth management — was a driving force behind small funds pushing for scale.
“Bigger wealth management firms increasingly require trusts to be larger, with better trading liquidity to get in and out,” he said. This has hurt demand for smaller trusts and increased the pressure on listed funds to scale up and lower costs in order to stay on wealth managers’ buy lists.
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The wave of consolidation has certainly been lucrative for shareholders so far. The industry has returned more than £14 billion since the start of 2023 through buybacks and cash proceeds from completed or agreed take-private deals, according to research from the broker Panmure Liberum. Lower charges are also expected to help to support higher returns. The Witan Alliance fund is now much cheaper for shareholders: after the merger its ongoing charge ratio is now within 0.57 per cent to 0.59 per cent, compared with a previously reported charge of 0.64 per cent at Alliance and 0.76 per cent at Witan.
So far, big asset management houses have dominated merger activity via “within the family” deals, with the likes of Abrdn, Invesco, JPMorgan and Janus Henderson simplifying their numerous funds.
The £3 billion JPMorgan Global Growth & Income trust has been a particularly active buyer of other JPMorgan funds. It has been the continuing fund in three deals since 2022, increasing its total assets nearly seven times over the past few years, according to calculations by Panmure Liberum.
It also found that Abrdn had been the most affected by the consolidation wave, with 11 of its funds involved in corporate action since the start of 2023. Since then Abrdn’s total assets managed within investment companies has dropped by about 36 per cent to £7.6 billion, according to Panmure’s analysis.
So which funds still look ripe for the taking? Those that specialise in British dividend-paying stocks and smaller companies look vulnerable, given the high number of smaller trusts and what Shonil Chande, of Panmure Liberum, described in an in-depth report as “little in the way of unique selling propositions”.
But it is renewable funds that look the most oversupplied, Chande said, with more than 21 funds on the market. Despite being some of the largest backers of green energy infrastructure — the £4.7 billion Greencoat UK Wind fund oversees 49 wind farms in Britain — on average they trade at a 28 per cent discount to their net asset value.
They are widely considered riskier than other core infrastructure funds because of their additional exposure to power prices. Panmure Liberum reckons that only half of them have a “fighting chance of ever returning to premiums” without joining forces.
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Across the board City analysts appear to be in consensus that the investment trust universe is going to end up much more streamlined over the next couple of years but will this make a meaningful difference to shareholders in investment trusts? Despite record levels of buybacks and M&A activity this year, London’s listed funds still mostly trade at double-digit discounts to their net asset value.
There is still much more to come. There are at least 40 funds — 13 per cent of the sector — that are either in a managed wind-down, strategic review, formally reviewing options to maximise returns to shareholders, or are in realisation. Over the next two years about 70 funds face votes on whether they should continue.
More “within the family” deals look likely too. Abrdn, for example, still has five different investment trusts that specialise in British stocks and three that specialise in Asian stocks. Janus Henderson, another serial consolidator this year, has five funds that specialise in British equities. In some cases sister funds are managed by the same investor. At Schroders, for example, there are three investment trusts focused on Asian stocks, two of them, Schroder Oriental Income and Schroder Asia Pacific, under the same fund manager.
Even larger funds may be tempted to join forces. Alliance Witan has so far been an outlier for its sheer size and FTSE 100 inclusion was a driver behind its merger. Alliance Trust and Witan, which were previously two of the 30 biggest trusts on the market, may inspire other bigger funds to plot routes into the index.