The board of the £372.6m Aberdeen Emerging Markets Investment Company (AEMC) has proposed a merger with the £82.5m Aberdeen New Thai investment trust, which will see the combined portfolios become a Chinese equity mandate.
The plans, which will also see AEMC move from a fund-of-funds structure to investing directly in equities, will lead to a tender offer for up to 15% of the company's shares.
According to AEMC's board, plans to overhaul the trust have been in place for some time, given the "attractiveness of the company's shares have been adversely affected by the current aversion to fund-of-funds structures and consequent look-through costs, particularly among wealth managers".
Attractiveness of the company's shares have been adversely affected by the current aversion to fund-of-funds structures."
While the trust has comfortably outperformed its sector average and MSCI Emerging Markets benchmark over one, three and five years, according to data from FE fundinfo, AEMC currently trades on a 13.4% discount to NAV, and has a three-year average discount of 14.4%, data from the AIC shows.
Lack of appetite from wealth managers has resulted in an "overly concentrated share register with limited free float", according to the trust's board, which it currently calculates to be 16%.
"One consequence of this has been the board's inability to undertake a determined buy back campaign to address the discount to net asset value at which the shares have traded in the stockmarket," it added.
In terms of the decision to switch the trust to a Chinese equity mandate, the board said ASI has a "strong record of performance" across its open-ended China funds, with more than £4bn invested in this specific area of the market as at 31 March 2021, and more than 30 years of experience investing directly into the market.
"Although China now ranks as the second-largest economy in the world, there are relatively few listed closed end fund offerings in the UK specialising in investment into companies based, or with substantial operations, in China," the board added.
"[ASI] has a large team based in Shanghai and Hong Kong, supported by team members in Singapore. ASI also brings a strong record of ESG integration into its investment processes and engagement with investment managers supported by on-desk ESG specialists, together with a very strong track record of investment in China."
As part of the overhaul, terms have been agreed between AEMC and Aberdeen New Thai to combine both trusts, given that New Thai's board has also been considering moving to an all-China investment mandate.
AEMC's board added that the merger is expected to improve New Thai's liquidity for all shareholders, as well as spreading the company's fixed costs over a larger pool of assets. It added that it should also increase the trust's free float.
FE fundinfo data shows that New Thai, which is part of the IT Country Specialist sector, has fallen by 16.8% in total return terms over the last three years, and is up 2.3% over five years. It is trading on a 12.5% discount to NAV, and has a three-year average discount of 13.5%.
If the merger is approved by each company's shareholders, it will be rolled out via section 110 of the Insolvency Act 1986, which will see the voluntary liquidation of New Thai and the rollover of its assets into the new larger trust, in exchange for the issue of new shares in the company to New Thai shareholders.
These new shares will be issued on a formula asset value (FAV) basis, and will be calculated using the "respective net asset values of each company, adjusted for the costs of implementing the proposals, any dividends and distributions declared by each party which have a record date prior to the effective date of the combination, an allowance for the costs of liquidation (for New Thai), the cash exit option (for New Thai) and the tender price pursuant to the tender offer referred to below (for the Company)," according to the board.
Portfolio overhaul and tender offer
The revamped trust will have a high-conviction portfolio of between 30 to 60 holdings, approximately 60% of which will be invested in the China A-Shares market. It will aim to outperform the MSCI China All-Shares index in sterling terms, as well as maintain a lower carbon profile and a higher ESG rating than its benchmark.
AEMC's portfolio managers Andy Lister and Bernard Moody are set to depart following the overhaul, while two of New Thai's current directors, Anne Gilding and Sarah MacAulay, have been invited to join the new trust's board after the transaction is completed. Mark Hadsley-Chaplin has been asked by the board to stay on as chair to oversee the trust's transition, and will step down after the company's 2023 AGM.
Given the significant changes to both portfolios, AEMC's board will roll out a tender offer for up to 15% of the shares in issue at 2% discount to FAV per ordinary share. New Thai shareholders who do not choose this option will default to the rollover option.
Chair Hadsley-Chaplin said: "After a very thorough selection process we concluded that Aberdeen Standard Investments (ASI) is extremely well-equipped to deliver highly competitive performance with this exciting new mandate.
"As we have seen this week, China's equity market can be volatile, but over the medium and long term, we believe it will generate tremendous opportunities for an expert investment team with feet on the ground.
"I would also note that the closed-ended structure is well-placed to withstand short term market volatility and to capitalise on longer term opportunities that arise from it."
He explained that that the likely improved liquidity of Aberdeen New Thai will help attract wealth managers and retail investors, "thereby diversifying the shareholder base".
"I would like to pay tribute to Andy Lister and Bernard Moody who, in spite of those headwinds, have been first class managers of AEMC during their time at ASI (and before) and I wish them every success in the future."
First published by our sister title Investment Week