The tortuous turnaround of BlackRock Income Strategies (BIST), the investment trust formerly known as British Assets, took a dramatic turn today after the board sacked fund management group BlackRock after a year and a half in charge.
Concluding a strategic review in response to an 18% slump in net asset value since BlackRock replaced F&C Investments in February 2015, the board announced it would stick to the new ‘multi-asset’ approach that replaced its previous global income remit, but would switch the management contract to Aberdeen Asset Management.
Once BlackRock’s contract has expired, Mike Brooks and Tony Foster of Aberdeen’s diversified multi-asset team will manage the trust which will be renamed the Aberdeen Diversified Income and Growth (ADIGT).
In a further twist the board of BIST has agreed terms to merge with Aberdeen UK Tracker Trust (AUKT), removing the investment trust sector’s only passive, index-tracking fund. This would increase the size of the trust, lower its cost ratio and improve the liquidity, or tradability, of its shares, it said.
Aviva Investors, the largest shareholder in both trusts, has agreed to back the proposals. It has been selling stakes in investment trusts inherited from its Friends Life acquisition all year.
Long-suffering shareholders, who endured poor capital growth but a high dividend under British Assets, will receive two more dividends, one of 1.635p, before the dividend is cut by 20% once the merger with AUKT completes. This would reduce the payout to a level more appropriate to the current low-yield environment, the board said. According to Numis Securities, at the current share price it would lower the 6.2% dividend yield to 4.8%.
The investment objective will be amended again to target an average annual return after costs of 5.5% over Libor, the inter-bank lending rate, over five-year rolling periods. This replaces the current aim of inflation (CPI) plus 4%.
The recently adopted zero discount policy will be dropped in the face of the fund’s continued low rating. The shares, up 2.75p to 108p today, closed last night at a discount of around 13% below net asset value. Adopting a more flexible stance towards the discount will avoid the problem of mounting share buybacks – the trust bought back 7.6 million in the year to September – while the trust remains out of favour. This could shrink the trust and worsen liquidity in the shares without narrowing the discount, it said.
A 20% tender offer will give BIST shareholders the chance to offload some or all of their shares before the merger takes place. AUKT shareholders will be able to cash in 40% of their stakes before the combination with BIST occurs. If these are taken up in full the new trust will start with £450 million of net assets, said Numis.
BIST chairman James Long explained the board had been disappointed with the performance for shareholders over the past 19 months.
‘The negative absolute returns delivered, coupled with our concerns over the sustainability of the dividend in the current low yield environment, led us to initiate the strategic review that we have now concluded.
‘Our comprehensive review has re-affirmed our conviction that a well-managed multi-asset portfolio within an investment trust structure is an attractive proposition for shareholders and is highly relevant in the pensions and savings market,’ he said.
Shareholders may pay slightly more in future, however. Under the agreement Aberdeen will be paid an annual management fee of 0.5% of net assets up to £300 million and 0.45% above £300 million. This compares to the 0.4% of gross assets, including debt, paid to BlackRock.
As head of Aberdeen’s diversified multi-asset team Mike Brooks is the co-lead manager of the Aberdeen Diversified Growth Fund. He joined Aberdeen last year from Baillie Gifford and has 22 years of investment experience. Tony Foster is a senior investment manager in the same team and joined Aberdeen two years ago following its acquisition of Scottish Widows Investment Partnership.
They will replace Adam Ryan and Mark Wharrier at BlackRock who were wrong-footed by the New Year sell off, took defensive steps to protect the portfolio and missed the subsequent market rally.
In its new form under Aberdeen, the BIST board claimed it would deliver greater capital stability than a conventional long-only equity fund and with less volatility. In addition to listed shares, the fund will invest in a wide range of assets, including unquoted shares, property, social and renewable infrastructure, emerging market bonds, loans, asset-backed securities, insurance linked securities, private equity, farmland and aircraft leasing.
Numis analyst Sam Murphy described the proposals as a ‘sensible solution’ for both funds but cautioned: ‘One danger is that there could still be some overhang of stock post-merger, and we believe that the board should continue to be proactive in managing the discount, even if it does not wish to be constrained by a zero discount control. If discount volatility is too great, we believe this would impact the attraction of the fund on a risk/return basis.’