Blockbuster Merger As Alliance Trust Combines With Witan

It has recently been announced that the assets of Witan (LON: WTAN) are to be rolled into Alliance Trust (LON: ATST) in the country’s largest ever investment trust merger. The new vehicle will be called Alliance Witan and will adopt ATST’s multi-manager approach once the transaction completes in September or October.

Witan has followed a similar strategy under the stewardship of CEO Andrew Bell and it was the announcement of his retirement that prompted the Board to consider all the various options. After conducting a full review it concluded that the merger with Alliance Trust was the best way forward for shareholders.

The broker Numis says that the combination with ATST was the obvious solution with both trusts following a multi-manager approach. They think that the merger is well-structured and that there are benefits of creating a scale player with assets of around £5bn.

Unique Approach

Alliance Trust has a unique approach with 8 to 12 managers each running a concentrated portfolio of around 20 of their best ideas. If all goes to plan this could provide greater diversity via the different investment styles, as well as additional concentration, with the returns being mainly driven by stock selection.

Since Willis Towers Watson (WTW) took over the mandate in April 2017, the fund has produced NAV total returns of 101.9% (10.2% per annum) compared to 101.1% (10.1% pa) for the MSCI AC World benchmark.

WTW is responsible for keeping the managers under review and will change them whenever necessary. It can also alter the allocation and will often trim the exposure to the winners and use the cash to top up the laggards.

The multi-manager approach can sometimes be quite expensive, but Alliance Trust is pretty good value with ongoing charges of 0.62%. This is expected to fall to the ‘high 50s’ once the new fee structure kicks in.

The Transition

Numis expect the line-up of managers to be tidied up quickly after the merger and think that this should be straightforward to execute. Witan also holds some investment trusts in its portfolio and these will be disposed of in a considered manner.

Shareholders in WTAN will have the opportunity of a partial cash exit of 17.5% of share capital at a 2.5% discount to NAV. Once the new vehicle gets going there should be significant liquidity, so it shouldn’t be a problem for anyone who wants to dispose of the rest of their investment.

Alliance Trust has historically traded on a narrower discount than Witan and has regularly bought back its own shares. The broker expects this to continue and thinks that the issuance and buybacks will help to keep the shares close to NAV, which is important when trying to attract new investors.

It looks as though the new vehicle will pay a dividend yield of around 2.3%. This is unlikely to be enough to attract income seekers, although Alliance is one of the AIC’s dividend heroes with 57 consecutive years of dividend growth.