Consolidation across the investment trust sector continues apace. The latest deal will see Pacific Assets Trust (LON:PAC) merge with Schroder Asian Total Return (LON:ATR), creating an Asia Pacific-focused fund with roughly £1.1 billion in net assets.
Pacific Assets shareholders will have the option to rollover their shares into Schroder Asian Total Return or elect for a 25% cash exit at a 2% discount to net asset value (NAV).
If one were looking for a downside to this deal, it does reduce choice for investors seeking Asia-Pacific exposure. The combination will cut the number of trusts in the Association of Investment Companies (AIC) Asia Pacific sector from four to just three.
Logical outcome
Pacific Assets has struggled since the departure of its Stewart Investors management team last year. In fact, it is the worst performer in the Association of Investment Companies (AIC) Asia Pacific sector on a one, five and 10-year view. In contrast, the larger Schroder Asian Total Return is the best five-year performer.
Back In December, Pacific Assets launched a strategic review following a restructuring at parent company First Sentier.
| Trust | Discount to NAV | 5-year return |
| Schroder Asian Total Return | 4.3% | 52.2% |
| Schroder AsiaPacific Fund | 8.8% | 47.3% |
| Pacific Horizon | 10.6% | 35.6% |
| Pacific Assets | 7.8% | 26.6% |
Source: The AIC/Morningstar
The latter closed the Stewart Investors business following the departure of Pacific Assets’ former lead manager David Gait and two colleagues. Management responsibilities for Pacific Assets were transferred to another affiliate, FSSA Investment Managers.
Following a thorough review, the board has concluded that the best solution for the trust is to combine with Schroder Asian Total Return.
Larger and more liquid
The enlarged trust will have the greater scale and increased liquidity desired in the investment trust industry. Cost efficiencies should also see ongoing Schroder Asian Total Return shareholders, and Pacific Assets shareholders who opt for the rollover option, benefit from lower ongoing charges.
Schroder Asian Total Return will also put forward a 15% performance-related tender offer to shareholders if its NAV growth fails to beat the MSCI benchmark over the five years to December 2030.
Benchmark beaters
Under co-managers Robin Parbrook and King Fuei Lee, Schroder Asian Total Return has delivered impressive annualised NAV total returns. These amount to 57.2%, 22.1%, 10.9% and 15% over the last one, three, five and 10 years respectively.
This compares to annualised returns from the MSCI AC Asia Pacific ex Japan Index of 51%, 21%, 8.7% and 11.8% over the same periods. No wonder the trust has consistently trading at the tightest discount in the sector.
Both managers have been involved with managing the strategy since launch. They are supported by an Asia Pacific ex Japan equities team of 49 research analysts located across six countries.
Strong discount management
Pacific Assets chairman Andrew Impey commented: ‘After a thorough review of a large number of high quality proposals as part of the strategic review, we are delighted to be able to announce the combination with Schroder Asian Total Return.’
He added: ‘Schroder Asian Total Return has an impressive record of attractive total returns from a differentiated investment strategy and a track record of strong discount management. We have every confidence that the enlarged company will be a leading Asian equities investment company for existing and future investors.’
The investment trust sector is undergoing consolidation as boards seek to narrow discounts to NAV, reduce costs and boost liquidity. In part, this trend has been driven by pressure from activists such as Saba.
On balance, we think the latest combination is a good outcome for both sets of shareholders. The enlarged Schroder Asian Total Return will have increased scale and liquidity and carry lower fees. The conditional tender offer is also positive news for Schroder Asian Total Return’s existing investors.
Winterflood commented: ‘This is a logical decision by the board, with the proposal giving shareholders access to what we consider to be a sophisticated strategy with a long track record of outperformance.’
Read the press release here: https://www.londonstockexchange.com/news-article/PAC/conclusion-of-strategic-review/17634124
