- Witan, the underperforming global equity giant, throws in the towel and becomes part of Alliance Trust
- The merger comes with plenty of sweeteners, although the new fund would have its risks too
Two of the highest profile equity investment trusts are to create a £5bn behemoth after Alliance Trust (ATST) announced it would take over its weaker-performing rival, Witan (WTAN).
Both trusts invest with a global mandate and use a multi-manager approach, employing other fund houses and investment firms to pick their stocks and implement the strategy.
The tie-up, subject to shareholder approval, would see the £1.8bn Witan portfolio rolled into ATST under the new banner of Alliance Witan. The new trust would stick with Alliance Trust’s current model of allocating capital to a handful of stockpickers with different styles and regional specialisms, who then pick between 10 and 20 of their best ideas.
Bringing together two of the investment trust sector’s oldest and biggest names, the combination is unsurprising. Alliance Trust, which adopted its current approach after a bruising tussle with an activist investor in 2015, has navigated market rotations well in recent years due to employing a range of managers who use different investment styles.
ATST shareholders took less of a hit during the 2022 sell-off compared with the MSCI World index and the average trust in the AIC's Global sector. The trust even managed to outperform the global equity index during the AI-fuelled frenzy of 2023. On a five-year view, shareholders are not far behind the MSCI World index.
However, Witan has long struggled against rival trusts and the broader stock market despite also using a multi-manager approach. Earlier this year, Investec analysts Alan Brierley and Ben Newell levelled savage criticism at the fund, pointing to a "catalogue of poor investment decisions" made by the trust over time, from holdings doing poorly to badly timed investments.
Witan mainly invests in stocks, although it also owns alternative plays such as private equity fund Apax Global Alpha (APAX) and VH Global Sustainable Opportunities (GSEO). This basket of names has had mixed fortunes, with APAX and GSEO struggling last year but other holdings such as Partners Group Private Equity (PEY), previously called Princess, performing well. The announcement in March that Witan chief executive Andrew Bell was set to retire ultimately prompted the board to review the trust's investment management arrangements.
As is often the case, the merger would come with some sweeteners for investors. Willis Towers Watson, which runs the Alliance Trust portfolio, has agreed to a new management fee structure for the combined entity of 0.52 per cent on the first £2.5bn of Alliance Witan’s market capitalisation, 0.49 per cent on the next £2.5bn and 0.46 per cent above the £5bn threshold.
Alliance Witan would also increase its third and fourth interim dividends for 2024 to match those distributions due to Witan shareholders. The new trust said it would keep increasing the payout so Witan shareholders “continue to see a progression in their income”. The two trusts are not huge income payers but have some appeal, with ATST on a share price dividend yield of 2.1 per and Witan on 2.3 per cent. Both also sit in the AIC’s Dividend Heroes list, with Alliance Trust having upped its payout for 57 consecutive years and Witan having done so for 49 years. But Stifel analysts noted that the former’s dividend has “historically been uncovered by revenue earnings”.
QuotedData analyst Andrew Courtney said the tie-up was “not an unexpected move” in light of Andrew Bell’s retirement and Witan’s poor performance, adding that it was “a good fit, given the similarities of the two funds”. The merger would also create a larger, more liquid vehicle at a time when trusts need even greater scale to remain viable.
Alliance Trust tries to strike a balance between different investment styles but it is still highly exposed to the waxing and waning of market trends. In particular, the fund is notably exposed to the Magnificent Seven stocks, with Alphabet (US:GOOG) making up 4.2 per cent of the portfolio, Microsoft (US:MSFT) on 3.3 per cent, Amazon (US:AMZN) on 3.3 per cent and Nvidia (US:NVDA) on 1.4 per cent at the end of April. The trust's 2023 results noted the seven stocks accounted for 34 per cent of the total portfolio return that year, significant but below the 53 per cent of its benchmark index.
The trusts will put the merger to a shareholder vote in September.
