Aberdeen Equity Income Trust [LON:AEI] is seeking to bulk up (and sweeten its proposition) with a recommended combination with Shires Income [LON:SHRS] that promises greater scale, broader diversification and lower costs for shareholders.
The two UK equity income trusts have published details of the proposed tie-up, first flagged in January, which would see Shires wound up under a scheme of reconstruction and its assets rolled into AEI. The enlarged vehicle, managed by abrdn Fund Managers, would emerge as the continuing company with net assets of between £300mn and £331mn, depending on how many Shires investors opt for cash.
Consolidation in the investment trust sector has gathered pace as boards grapple with persistent discounts, rising costs and a fragmented shareholder base. Scale, the argument runs, begets liquidity, relevance and fee efficiency. In that respect, the logic here is straightforward.
The combined trust would retain AEI’s core UK equity income focus but adopt elements of Shires’ more eclectic toolkit, notably exposure to investment-grade fixed income securities, preference shares and selective developed market overseas equities.
Subject to shareholder approval of an updated investment objective, this blend aims to create what the boards describe as a more “differentiated” offering within the AIC’s UK Equity Income sector.
For income-focused investors, the message is reassuringly familiar. Both trusts already yield above the sector average. AEI has built a reputation as an AIC “Dividend Hero”, delivering 25 consecutive years of dividend growth. The board intends to extend that record to 26 years, maintaining a progressive policy. For the year to September 2025, AEI paid 23p per share; for the current year it expects to pay at least 23.1p.
Crucially, the board believes there should be no reduction in dividend income for shareholders of either trust as a result of the merger. Revenue and realised capital reserves provide additional ballast if needed.
Cost is another selling point. The enlarged vehicle will retain AEI’s existing management fee of 0.55 per cent of net asset value, plus a £120,000 fixed fee (linked to CPI). The ongoing charges ratio is expected to fall to no more than 0.78 per cent, below AEI’s current 0.84 per cent and materially under Shires’ 1 per cent. abrdn has also agreed to absorb scheme costs above certain limits through fee waivers and offsets, cushioning the net asset value impact.
Shires shareholders unwilling to roll over will be offered a partial cash exit at a 2 per cent discount to residual fair asset value, capped at 25 per cent of issued share capital. That flexibility may smooth the path to approval.
