LONDON: JPMorgan UK Small Cap Growth & Income plc (JUGI) and Aberdeen UK Smaller Companies Growth Trust plc (AUSC) announced Friday that their boards have agreed heads of terms for a combination of the two investment trusts, a deal both companies say will create one of the largest funds in the UK smaller companies sector.

The combination, which follows a competitive private review process run by AUSC’s board, would be carried out through a members’ voluntary winding up of AUSC via a scheme of reconstruction under Section 110 of the Insolvency Act 1986, according to a joint statement from the companies.

Under the plan, AUSC shareholders would be entitled to receive new shares in JUGI or to cash out some or all of their holdings, subject to a cap of 35% of AUSC’s share capital. Shareholders who do not make a valid cash election will be deemed to have chosen to roll their holdings into new JUGI shares.

The number of new JUGI shares issued would be calculated on a formula asset value-to-formula asset value basis, adjusted for transaction costs, a 2% discount applied to the cash option, and a management fee waiver. Cash entitlements would be based on AUSC’s residual net asset value as of a scheme calculation date, less that same 2% discount.

If the deal closes, the enlarged JUGI would continue to be managed by JPMorgan Funds Limited, which delegates portfolio management to JPMorgan Asset Management (UK) Limited — together referred to as JPMF — under JUGI’s existing investment objective and policy. JPMF has agreed to cut the management fee it charges the enlarged trust to 0.60% annually on net assets up to £200 million and 0.55% on net assets above that threshold, down from the current 0.65% and 0.55%, respectively. JPMF has also pledged what the companies described as a “substantial financial contribution” toward the cost of the transaction.

“We are delighted to announce a proposed combination with AUSC following a competitive process,” Katrina Hart, chair of JUGI, said in the statement. She said the deal would improve market liquidity and reduce ongoing charges, and called it “JUGI’s second consolidation in the last three years,” adding that the board’s ambition is for JUGI to be seen as “the pre-eminent investment trust investing in UK smaller companies.”

Liz Airey, chair of AUSC, said the deal gives shareholders “the opportunity to roll over their holdings into an investment trust with exceptional long-term performance within the UK smaller companies sector,” and said those who do so would benefit from a larger, more cost-efficient trust with better trading liquidity.

JUGI, launched in 1990, is one of the oldest smaller companies investment trusts in its sector. It merged with its sister trust, JPMorgan Mid Cap Investment Trust plc, in 2024. The fund is managed by Georgina Brittain and Katen Patel, who have run it for 28 years and 12 years, respectively, and has outperformed its composite benchmark by an average of 4.2 percentage points annually over the past decade, according to the companies.

JUGI also targets an annual dividend equal to 4% of its prior year-end net asset value, paid quarterly and funded from both income and realized capital returns — a policy the companies said would mark a significant increase in dividend yield for AUSC shareholders who roll over their holdings.

The companies said JUGI’s current ongoing charges ratio of 73 basis points is expected to fall to about 70 basis points for the enlarged trust, a reduction of 11 basis points compared with AUSC’s current ratio and 3 basis points compared with JUGI’s. JPMF, which the companies described as a market leader in UK investment trusts with £16 billion in assets under management, is also expected to fund additional marketing and promotional activity for the combined trust.

The companies said eligible AUSC shareholders who elect to roll over their holdings are expected to be able to do so without triggering a UK capital gains tax liability.