Alliance merger to create giant investment trust

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The Independent Online

Alliance, the Dundee-based fund management group, is to merge its two largest funds to create Britain's second largest investment trust. The merger is the latest in a series of deals designed to broaden the appeal of the investment trust sector, traditionally a sleepy City backwater.

If 60,000 shareholders in Alliance Trust and Second Alliance approve the deal, the new fund will have assets of £2.8bn. That would catapult it ahead of Foreign & Colonial, with assets of £2.6bn, although the venture capital giant 3i would still be larger, at about £4bn.

Alan Hardern, Alliance's chief executive, said the deal would give the combined trust a better chance of improving performance. The two trusts currently have very similar portfolios and are run by the same set of managers and directors.

Mr Hardern said: "This will create a large, single, combined entity that can be faster and more efficient in the market."

The deal follows a series of corporate actions among large investment trusts, which have struggled to attract support from both retail and institutional investors. A shortage of demand during the late 1990s and the 2000 to 2002 bear market led to shares in the sector trading at discounts to its net asset value of more than 15 per cent.

However, last year, trusts including Foreign & Colonial, Invesco English & International and Gartmore Global introduced share buy-back programmes. Separately, Foreign & Colonial Emerging Markets agreed to a takeover from a rival trust, while Martin Currie Japan announced it would wind up.

In the first three months of 2006 alone, Tribune, JP Morgan Fleming Overseas and Prelude have launched reconstruction plans. As a result, the sector's average discount has fallen to 5.7 per cent, the lowest level for more than 10 years.

Daniel Godfrey, the chairman of the Association of Investment Trust Companies, said: "While the ongoing trend of activity has been prompted by external pressures in some cases, it has also been driven by boards who have increasingly demonstrated their independence."

Alan Ray, an investment trust analyst at Panmure Gordon, said Alliance would need further action to tackle its own discounts - shares in both trusts trade at a discount to the value of their underlying assets of just over 10 per cent.