Investors should benefit from "greater economies of scale" as well as lower fees and improved liquidity after the blockbuster merger of the £581m Murray Income Trust (MUT) and the £642m Perpetual Income and Growth trust, analysts have predicted.
The two investment companies announced the tie up, subject to shareholder approval, on Wednesday (29 July), creating a £1.2bn mandate, the third largest in the Association of Investment Companies' UK Equity Income sector.
PLI will merge into MUT and will be run by Aberdeen Standard Investments' Charles Luke. The PLI board had previously said it was open to a merger, though chairman Richard Laing told Investment Week the "overall objective was to find the best manager" for the trust.
"A merger adds further enhancement in terms of management fees because a larger trust can, as a percentage of assets, have a very keen fee," Laing reasoned.
"The other advantage, of course, is you have a bigger company and therefore higher liquidity in the shares. And Murray Income's discount [at around 4%] is a lot narrower than PLI's discount [at around 15%]."
MUT chairman Neil Rogan added he hoped that greater liquidity would improve the trust's rating.
Commentators welcomed the decision, with head of personal investing at Willis Owen Adrian Lowcock applauding the "significant decision" taken.
"The investment trust space should benefit from having a larger trust in this area and investors should benefit from greater economies of scale, lower fees and improved liquidity in the trusts shares," Lowcock reasoned.
Positive development for IT sector
Analysts at Numis, who recently called for consolidation across the investment company sector, agreed.
"We believe it is positive for the IC sector to see a merger, particularly of funds already of reasonable size, to create a vehicle that has the potential scale to appear to institutional investors and retail platforms," they said in a note.
They noted that previous trust mergers had resulted in delivering "significantly higher trading liquidity".
Standard Life UK Smaller Companies, for instance, has seen trading liquidity increase by over 50% post its combination with Dunedin Smaller Companies. After Diverse Income's merger with Miton Income Opportunities, the combined trust saw an increase of over 40%.
From a trust-specific point of view, a reduction in fees will bring benefits to investors. The trust will carry a management fee of 0.38% with an ongoing charge of 0.5%, below the current level of 0.62% for MUT and 0.73% for PLI.
Shares in PLI jumped by 6% on Wednesday; MUT slipped by around 2%, though that was largely the result of arbitrage players, said J.P. Morgan Cazenove analyst Christopher Brown.
Brown said a merger was "a better option for PLI shareholders than a simple manager change within the existing corporate structure, since it should lead to a more immediate value uplift".
"MUT is a very good choice of partner, in our view."