Struggling Scottish Oriental Smaller Companies (LON:SST) has cancelled plans for a 25% tender offer and launched a strategic review of its future options. These may include a merger, more than likely with one of the trust’s two sector peers, Aberdeen Asia Focus (LON:AAS) or Fidelity Asian Values (LON:FAS).
Following consultation with a number of its largest shareholders, Scottish Oriental Smaller Companies has decided to undertake a strategic review of the fund’s future options.
Chaired by Jeremy Whitley, the board said it still believes in the merits of investing in Asian smaller companies.
‘The strategic review will therefore focus on options that preserve shareholders’ access to this investment opportunity through a vehicle with the scale and liquidity appropriate to their needs,’ explained the board. ‘This will include consideration of a potential combination with another investment company.’
Scale and liquidity
As announced on 2 September, following the triggering of the performance-conditional tender offer, the board has engaged with shareholders to consider whether additional actions are required.
| Asia Pacific Smaller Companies Sector | Disc/prem | 1-yr share price total return (%) | 5-yr share price total return (%) | 10-yr share price total return (%) |
| Aberdeen Asia Focus | -9.7% | +30.8 | +87.8 | +200.1 |
| Fidelity Asian Values | -5.5% | +6.2 | +45.6 | +122.3 |
| Scottish Oriental Smaller Companies | -7.8% | +0.5 | +30.3 | +66.6 |
Source: The AIC/Morningstar
These discussions have highlighted the importance of scale and secondary market liquidity, alongside investment performance, in meeting shareholders’ long-term needs. On a share price total return basis, Scottish Oriental Smaller Companies has lagged its two sector rivals over one, five and 10 years.
During the strategic review, FSSA Investment Managers will continue to manage the portfolio. Should the trust be merged away, this would mark FSSA’s second investment trust mandate loss this year. Last month, FSSA-managed Pacific Assets (LON:PAC) merged with Schroder Asian Total Return (LON:ATR).
Scottish Oriental Smaller Companies only proposed a conditional tender offer in September, so the strategic review represents a significant pivot by the board.
Today’s announcement stresses that scale and liquidity have become increasingly important concerns for shareholders. And this means maintaining the existing structure is no longer an option.
Analyst views
QuotedData analyst Richard Williams said: ‘We’d expect a solution that offers investors the 25% cash exit opportunity they had been expecting, while creating a larger, more liquid vehicle for those wishing to retain exposure to Asian smaller companies. Consolidation now looks a distinct possibility.’
Winterflood’s Emma Bird added: ‘As the future strategy is expected to continue to be focused on Asian smaller companies, a proposed merger with either Aberdeen Asia Focus or Fidelity Asian Values, with a partial cash exit, seems to be the most likely outcome of the review, as these are the only other investment trusts in the Asia Pacific Smaller Companies peer group.’
Of these, Bird expects Aberdeen Asia Focus to be the frontrunner, ‘given its significantly stronger performance record over the last one, three and five years and its larger size (versus Fidelity Asian Values), although we acknowledge that it is trading at a wider discount.’
