A £30m emerging markets trust that is only a year old has moved to buy the under-performing £600m Abrdn-managed Asia Dragon trust.
Ashoka Whiteoak Emerging Markets, which launched in May of last year, is seeking to buy the Asia Dragon trust, which launched in 1987 and manages over 20 times as much in assets.
In a stock exchange announcement, Ashoka’s trust said it had put forward a proposal to merge the two trusts, with the option of a cash exit of up to 50 per cent for Asia Dragon shareholders.
The move for a comparably tiny young trust to buy one from a giant like Abrdn, which runs the third oldest investment trust in the world, is definitely a surprising move, but Ashoka’s board said it had already received support in principle from 56 per cent of Asia Dragon shareholders.
Shavar Halberstadt, analyst at Winterflood, noted it was also “not common to see public merger proposals without board alignment for funds that are not in wind-down or conducting a strategic review”.
Ultimately, it could all come down to performance.
The Asia Dragon trust is the worst-performing large-cap trust in the Asia sector, having lost around 24 per cent in the last three years compared to a three per cent drop in the index and an 11.5 per cent drop in its peer group.
The trust merged with its stable mate Abrdn New Dawn last year, which seems to have had no impact on improving its performance.
This has left Asia Dragon’s share price at a 14.6 per cent discount to its net asset value, compared to Ashoka’s 5.6 per cent discount.
However, Ashoka’s trust is similarly not performing well. The trust’s share price has grown 4.9 per cent in the last year, compared to a 14.2 per cent return to the Morningstar emerging markets index, or an 11.3 per cent return to the sector average.
For comparison, Asia Dragon has grown 3.3 per cent in the last year, versus a 9.1 per cent sector average return for Asian trusts.
However, this is only over one year, and Ashoka’s management is seen as very strong, given manager Prashant Khemka is the former CIO of Goldman Sachs’ emerging market strategy.
Numis analysts Ewan Lovett-Turner and Gavin Trodd added that this made a lot of sense to “turbocharge” the growth of the Ashoka trust, noting that Ashoka India had soared from £45.6m at launch to around £380m.
Winterflood’s Halberstadt also stated that a key motivator is also likely the cash exit, which he said he considered “good practice”, even it could potentially “reduce scale and therefore dilute any expected cost reduction benefits of the transaction if there is significant take-up of the exit opportunity”.
The merger should be fairly easy, was 55 per cent of Asia Dragon’s portfolio overlaps with Ashoka’s, with nine of Asia Dragon’s top ten stocks found within the portfolio.
Meanwhile, the path to a majority of Asia Dragon shareholders agreeing should be fairly simple, as the trust has a very concentrated shareholder base, with City of london holding around a 30 per cent stake alone.
“Overall, we believe that the increased corporate activity observed across the investment trust universe is a healthy development, eventually resulting in a stronger and leaner sector, whether or not this surprising proposal goes ahead,” concluded Halberstadt.
Asia Dragon’s share price has risen eight per cent on the announcement, while Ashoka’s is down 0.3 per cent.
Martin Shenfield, chair of Ashoka’s trust, said: “We have always sought as a company to put the interests of shareholders first, for example through our market-leading, shareholder-friendly structures.
“We believe this is the primary obligation of a truly independent board. We have listened to clear feedback from a majority of Asia Dragon shareholders and proposed a transaction that has their support. Sadly, we have not received any meaningful engagement with the board of Asia Dragon.”