The Scottish Investment Trust Plc – General Meeting

Publication of Circular

Introduction and overview

Earlier this year, the Board of the Company announced its intention to undertake a review of its investment management arrangements. The Board explained that the Company's high conviction, global contrarian investment approach, adopted in 2015, had resulted in the Company's NAV total return underperforming the sterling total return of the MSCI All Country World Index over the 5 years ended 30 April 2021 and as such that the Board felt it was appropriate to consider the future of the Company's management arrangements at this time. The Board invited proposals from established management groups and, having reviewed and evaluated the various submissions with the assistance of Stanhope Consulting (alongside the Company's existing management arrangements), it announced on 20 October 2021 that it had agreed heads of terms with JPMorgan Global Growth & Income plc (“JGGI”) and JGGI's manager, JPMorgan Funds Limited (“JPMF”), for a combination of the assets of the Company with JGGI by means of a section 110 scheme of reconstruction (the “Transaction”).

It is anticipated that it may be a number of months before the Transaction can formally proceed, due to the additional complexities inherent in a self-managed investment vehicle such as the Company. The Board, JGGI and JPMF have therefore agreed that the process should be effected in two stages, with the Company initially appointing JPMF (which will delegate to JPMorgan Asset Management (UK) Limited (“JPMAM”)) to manage its portfolio and adopting a new investment strategy substantially identical to that of JGGI (referred to as the “Investment Management Change”). It will only be at a later date, as and when the Company has taken all steps necessary to allow it to be placed into liquidation in an orderly fashion, that the Transaction will actually take place.

The Board is pleased to announce that the Company has today published a circular to the Company's shareholders (“Shareholders”) in connection with the Proposals (the “Circular”). The purpose of the Circular is to explain the Transaction in further detail, and to convene a general meeting (the “General Meeting”) at which approval will be sought from the Company's Shareholders for the first phase of the process to be implemented i.e. for JPMF to be appointed as the Company's manager and for the Company to adopt the new investment strategy, further details of which are set out in Part 2 of the Circular. For the avoidance of doubt, neither the Company's current investment objective and policy, nor its dividend policy, will change as part of this phase.

Notice of the General Meeting, which is to be held at The Royal College of Physicians of Edinburgh, 11 Queen Street, Edinburgh EH2 1JQ on 9 December 2021 at 10.00 a.m. is set out at the end of the Circular.

Change of investment management arrangements  

The review process

As explained above, as part of the Board's review of the Company's management arrangements, the Board invited proposals from established fund management groups with the experience of managing listed closed-ended funds designed to deliver, over the longer term, above index returns through a diversified global portfolio of attractively valued companies with good earnings prospects and sustainable dividend growth. These proposals were reviewed alongside the Company's current management arrangements.

A large number of proposals was received, and each one was carefully evaluated by the Board, with assistance from Stanhope Consulting, against a wide range of criteria.  As part of this thorough exercise, consideration was given in turn to retaining the Company's internal investment management structure; to appointing an external third party manager; and to effecting a combination with another investment trust. 

The decision reached

The Board was particularly impressed by the investment strategy that JPMAM deploys for the benefit of JPMorgan Global Growth & Income PLC, and concluded that the benefits of a combination (through a scheme of reconstruction pursuant to section 110 of the Insolvency Act 1986) with JGGI to form a significantly larger company would represent the most appropriate course of action, having regard for the best interests of the Company and its Shareholders as a whole. In reaching this decision, the Board noted a number of attractions to a combination with JGGI:

Strong historic investment performance : Over the five years ended 31 October 2021, the NAV total return of JGGI was 13.65 per cent. per annum representing outperformance of 1.39 per cent. per annum against the MSCI All Country World Index in Sterling.

Style-agnostic : The JGGI investment strategy is agnostic as between value and growth, focusing purely on the best total return opportunities. This affords the investment manager the flexibility to tilt the portfolio further towards, or further away from, value stocks or growth stocks as it sees fit, in a manner which is not possible under the Company's current investment strategy. 

Deeply resourced capability : JPMorgan Chase & Co (Asset and Wealth Management) is one of the leading global asset managers with assets under management of USD3.0 trillion as at 30 September 2021, and the JGGI investment management team is supported by over 80 in-house research analysts located globally. The Board believes this highlights the increasing difficulties faced by a self-managed company with limited resources, such as the Company, to have the required depth of research to pursue a global equity mandate, and therefore the benefits of the combination with JGGI.

Attractive dividend : JGGI has a distribution policy which targets aggregate dividends in each financial year representing at least 4 per cent. of JGGI's net asset value at the end of the preceding financial year.  The expected dividends of 16.96 pence per JGGI share in respect of the 12 months from 1 July 2021 represent a yield of 3.6 per cent. based on the closing JGGI share price of 470 pence on 10 November 2021.

Expected substantial uplift for shareholdings in the Company : The Company's Shareholders are expected to benefit from a re-rating of their investment in the Company. The Company's Shares traded at an average discount to NAV (cum income, debt at fair value) of 10.4 per cent. in the three months preceding the announcement of the Company's strategic review on 2 June 2021. In contrast, JGGI traded at an average premium to NAV (cum income, debt at fair value) of 2.5 per cent. over the same time period. As at close of business on 10 November 2021, JGGI's shares traded at a 2.98 per cent. premium to NAV (cum income, debt at fair value). Since announcement of the Company's proposal to appoint JPMF as the Company's AIFM and undertake the Transaction, the Company's discount has narrowed from 12.6 per cent. (as at 19 October 2021) to 6.1 per cent. (as at 10 November 2021). For information, the Company's policy of buying back shares for the purposes of discount management was temporarily suspended in the weeks preceding the announcement of 20 October 2021.

Scale : The combined company will have net assets in excess of £1.3 billion (based on valuations as at 10 November 2021), creating a leading investment vehicle for global equity investing that delivers an attractive dividend yield.  The scale of the combined company should improve secondary market liquidity for the Company's Shareholders and will achieve cost efficiencies. 

Low ongoing charges : JGGI will benefit from a new scaled annual management charge (“AMC”) agreed between JGGI and JPMF. By way of illustration, based on valuations as at 10 November 2021, this new AMC would  result in an initial weighted average AMC of 0.49 per cent. of net assets and forecast ongoing charges of 0.56 per cent. in the 12 months following implementation of the Transaction. For the avoidance of doubt, during the period of JPMF's appointment as the Company's AIFM up until implementation of the Transaction, JPMF will be entitled to receive a management fee payable by the Company quarterly at a rate equivalent to 0.55 per cent. per annum on net assets.

Leading investment trust platform : JPMAM is one of the leading managers of closed-ended vehicles in the UK, managing 20 investment companies with an aggregate market cap in excess of £12.9 billion (as at 10 November 2021).  JGGI benefits from JPMAM's extensive investment company management and marketing resources.

Contribution from J.P. Morgan Asset Management : JPMAM has agreed to make a costs contribution in respect of the Transaction equivalent to the management fees payable by the enlarged vehicle in respect of the eight month period immediately following completion of the Transaction.

Implementing the Transaction

While a section 110 reconstruction typically takes a number of months to complete, the fact that the Company is self-managed is likely to lead to a more protracted timetable than usual as matters such as the Company's pension scheme must be properly and carefully addressed in advance. Given that it may therefore be some time until the Transaction can formally proceed, the Board, JGGI and JPMF have agreed that the process should be effected in two stages. In the first stage, the Company will appoint JPMF to manage its portfolio and will adopt a new investment strategy which is substantially identical to that of JGGI. In the second stage, which will proceed as and when the Company has taken all steps necessary to allow it to be placed into liquidation in an orderly fashion, the scheme of reconstruction will take place and the Company's Shareholders will have their shareholdings in the Company replaced with shares in the newly enlarged JGGI.

At the General Meeting, approval will be sought from Shareholders for the appointment of JPMF as AIFM to the Company and for the adoption of a new investment strategy which is substantially identical to that of JGGI, as set out in Part 2 of the Circular. While the two stages of the process are inextricably linked, so that support for the appointment of JPMF as the Company's manager is also likely to imply support for the implementation of the Transaction, the latter will be the subject of separate Shareholder votes at general meetings of the Company to be held in the first quarter of 2022, provided that the Resolution presently being put forward is passed.

If the Resolution is approved, it is anticipated that JPMF's appointment and the change in investment strategy will take effect on or around 21 January 2022, from which point the Company will be managed by JPMF and JPMAM in a comparable fashion to JGGI. It is also expected that company secretarial and administration functions will also move across to JPMorgan as part of the Investment Management Change. Under the new investment management arrangements (intended to remain in place for only two or three months) and assuming responsibility for all company secretarial and administration matters also moves across to JPMorgan, JPMF will receive a management fee payable by the Company quarterly at a rate equivalent to 0.55 per cent. of net assets per annum. The appointment will be terminable by either party on six months' notice or on the Company going into voluntary winding-up. As and when the Company has taken all the necessary steps (notably with regard to its employee pension scheme and debtholders) to allow it to enter into voluntary winding-up in an orderly fashion, subsequent general meetings of the Company will be convened and authority will be sought from Shareholders for the Transaction formally to proceed. Implementing the scheme of reconstruction will see the Company placed into voluntary winding-up, the management arrangements between the Company and JPMF automatically terminated and Shareholders receiving shares in JGGI. It is currently anticipated that the Transaction will be undertaken at the end of the first quarter of 2022.

Portfolio realignment and debtholders

The Board has instructed the Company's existing investment manager to continue to manage the portfolio in line with the Company's current investment strategy. With effect from the appointment of JPMF as the Company's AIFM, the Company will be managed under the new investment strategy. It is expected that realignment of the portfolio will occur around the date of JPMF's appointment. Throughout this process and up until its winding-up, it is expected that the Company will remain a member of the AIC within its 'Global' subsector.

The Company currently has both secured bonds and perpetual debenture stock. The secured bonds are secured by a floating charge over the assets of the Company and have a redemption value in 2030 of £82,827,000. Implementation of the wider Transaction is conditional on the approval of the secured bond holders and the Board continues to liaise with the trustee of the bonds in seeking to obtain the approval of the underlying holders as soon as possible. The 5 per cent., 4.25 per cent. and 4 per cent. perpetual debenture stock have an aggregate nominal value of approximately £2,059,000 (as at 31 October 2021) and the Board intends to repay these following implementation of the Transaction (if approved).

JPMorgan Global Growth & Income's strategy and performance

Strategy

JGGI follows a high conviction, bottom-up stock picking approach, drawing on the expertise of over 80 in-house research analysts focusing on long-term forecasting and structural change to identify the longer-term industry trends of the future. Specifically, as JPMAM believes a company's value is determined by its future cash flow stream, it believes structural changes will determine tomorrow's winners and losers, with ESG factors both informing and influencing the investment manager's longer-term forecasting. Importantly, JGGI's strategy is not heavily value or growth orientated and instead aims for repeatable outperformance over a variety of market conditions. As at 31 October 2021, this process had delivered a NAV total return (net of fees) for JGGI of 1.7 per cent. per annum over the MSCI All Country World Index since inception on 30 September 2008.

Performance

The NAV total return of JGGI, the Company and the MSCI All Country World Index over various time periods to 31 October 2021 is set out below.

Source: © Morningstar 2021

Dividends

Under JGGI's current distribution policy, at the start of each financial year the company will announce the distribution it intends to pay to shareholders in the forthcoming year in quarterly instalments. In aggregate, JGGI's current intention is to pay dividends totalling at least 4 per cent. of the net asset value of JGGI as at the end of the preceding financial year. Where the target dividend is likely to result in a dividend yield that is materially out of line with the wider market, the JGGI board may choose to set the target dividend at a different level that is more in-line with the wider market and other global income trusts and funds.

For the avoidance of doubt, the Company's current dividend policy will not change up until the effective date of the Transaction. Following implementation of the Transaction, the above JGGI dividend policy (which includes the ability to pay dividends out of capital), will apply to all new JGGI shares held by the Company's Shareholders. Whilst the JGGI policy differs from the approach adopted by the Company historically (which has focused on payment of dividends from earnings, as supplemented by revenue reserves), your Board believes the ability to pay dividends out of capital can offer tangible benefits to shareholders, including allowing the investment manager to retain full flexibility and control over stock picking without sacrificing high conviction opportunities in the pursuit of yield and offering the ability to smooth dividend payments through low yield environments.

Further details on JGGI's investment strategy and key characteristics of its portfolio are set out in Part 2 of the Circular.

Publication of Circular and General Meeting

In the light of the above, the Company has today published a circular convening the General Meeting to be held at 10.00 a.m. on 9 December 2021 at The Royal College of Physicians of Edinburgh, 11 Queen Street, Edinburgh EH2 1JQ.

At the General Meeting, a resolution (which will be proposed as an ordinary resolution) will be put to shareholders seeking approval for the appointment of JPMF as the Company's manager and for the Company to adopt an investment strategy substantially identical to that of JGGI. If the Resolution is passed, these changes are expected to be implemented on or around 21 January 2022.

If Shareholders do not vote in favour of the appointment of JPMF as the Company's manager, the Board will reassess the Company's strategic options for the future of the Company and will consult with the largest Shareholders.

A copy of the circular has been submitted to the Financial Conduct Authority and will be available for inspection at the National Storage Mechanism which is located at https://data.fca.org.uk/#/nsm/nationalstoragemechanism and on the Company's website at www.thescottish.co.uk .

Note:

This announcement does not contain all the information which is contained in the Circular and Shareholders should read the Circular in full before making a decision.

Defined terms used in this announcement have the meanings given in the Circular unless the context otherwise requires.