Struggling investment trusts JPMorgan US Smaller Companies (LON:JUSC) and Brown Advisory US Smaller Companies (LON:BASC) plan to merge.
Both funds have underperformed the Russell 2000 Index in recent years, leaving their share prices languishing on discounts to net asset value (NAV). And crucially, the merger has the backing of Saba Capital, which has a 16% stake in BASC. The feared US activist will sell its entire holding in BASC. It has also agreed a two-year ‘standstill’ not to bring any resolutions against the enlarged JUSC.
Urge to merge
Having completed its strategic review, the BASC board has decided a merger with JUSC is the best outcome for investors. Shareholders will be offered the opportunity to roll their investment into an enlarged JUSC, or realise some or all of their holding for cash at close to NAV.
| AIC North American Smaller Companies Sector | Total assets (£m) | Discount/premium to NAV | 5-yr share price total return |
| Brown Advisory US Smaller Companies | 188.2 | -6.3% | 16.1% |
| JPMorgan US Smaller Companies | 244.6 | -8.8% | 4.2% |
Source: The AIC/Morningstar
Winterflood’s Emma Bird said it is ‘slightly surprising’ to see JUSC selected as the rollover option in this deal. JUSC has underperformed BASC and the Russell 2000 over one, three and five years and also trades on the wider discount of the two trusts.
Nevertheless, the enlarged trust will continue to be managed by JP Morgan Asset Management’s Don San Jose, Dan Percella, and Jon Brachle. This trio invests in high-quality smaller cap companies in the US market, trading at reasonable valuations.
Heart of America
JUSC chair Dominic Neary insisted the merger offers ‘significant benefits’ for all shareholders. ‘With increased scale ever more important in the investment trust market, shareholders in the combined JUSC will benefit from an enlarged vehicle, with improved liquidity and lower ongoing costs.’
Neary added: ‘This provides a compelling platform for shareholders to “Invest in the Heart of America”, accessing an asset class that offers attractive long-term opportunities through a structure that offers enhanced returns, strong governance oversight and shareholder representation.’
BASC chair Stephen White still sees a favourable outlook for US smaller companies. ‘The macroeconomic background remains supportive, valuations are attractive and there are signs that investors are revisiting the asset class as they take profits in other parts of their portfolios that have performed strongly.’
White added: ‘We believe the proposed combination creates a stronger vehicle through which shareholders can retain exposure to that opportunity over the long-term.’
On balance, this looks a good deal for both sets of shareholders. BASC shareholders who want to take the money and run can receive cash at a modest 0.75% discount to NAV. And those who still believe in the US smaller companies opportunity can roll into JUSC, without triggering a capital gains tax liability.
For those rolling over, the combination should create a larger, more liquid and lower-cost trust. The addition of a five-yearly tender offer to JUSC’s existing discount controls is welcome.
And as Winterflood’s Emma Bird noted: ‘The commitment from Saba to fully exit their holding and sign a 12-month standstill agreement also removes a key uncertainty overhang for BASC shareholders.’
