LONDON: Two of Britain’s only dedicated U.S. smaller-companies investment trusts have agreed to combine, with the activist hedge fund Saba Capital Management backing the deal and agreeing to cash out of its stake.

JPMorgan US Smaller Companies Investment Trust plc, known as JUSC, and Brown Advisory US Smaller Companies PLC, or BASC, announced Wednesday that they had agreed non-binding heads of terms for the combination. The deal follows a strategic review by BASC’s board, which concluded the merger offered the best outcome for its shareholders.

The transaction would be carried out through a members’ voluntary winding up of BASC under section 110 of the Insolvency Act 1986, with certain assets transferred to JUSC. BASC shareholders could take new JUSC shares, cash, or a mix of both. The cash option would be priced at a 0.75% discount to BASC’s residual net asset value.

The enlarged JUSC would continue to be managed by JPMorgan Funds Limited under its existing investment objective and policy.

Saba, which holds about 16% of BASC, has given an irrevocable undertaking to vote in favor of the plan and to choose the cash option for its entire holding. Saba, BASC and JUSC also signed a standstill agreement under which the hedge fund agreed not to put proposals to JUSC shareholders or requisition a general meeting of JUSC. Those commitments expire Oct. 7, 2027. Saba holds no interest in JUSC.

“There are significant benefits of this combination for all shareholders,” JUSC Chairman Dominic Neary said, pointing to improved liquidity and lower ongoing costs from the larger vehicle.

BASC Chairman Stephen White said the board had considered a broad range of options and partners. Shareholders who want to stay invested would keep exposure to U.S. smaller companies in an investment trust, he said, while others could exit fully for cash.

As part of the proposals, JUSC and JPMorgan agreed to cut the combined trust’s annual management fee to 0.65% on the first 200 million pounds of net assets and 0.60% on anything above that. The companies estimate annual cost savings of about 20 basis points for rolling BASC shareholders and about 13 basis points for existing JUSC shareholders.

JPMorgan also would contribute at least 12 months of management fees on the net assets transferred from BASC to help cover transaction costs. It would make a separate contribution to marketing the enlarged trust.

JUSC also plans to add a conditional tender offer from Jan. 1, 2027, to its existing discount-management measures of share buybacks and five-yearly continuation votes. Every five years, the trust would offer to buy back 30% of its shares at a 2% discount to net asset value. The offer would be triggered only if JUSC trailed the Russell 2000 Index over the previous five years, measured in sterling terms with net dividends reinvested, and if its shares traded at an average discount wider than 5% over the preceding 12 months.

Eligible BASC shareholders who roll over into JUSC are expected to avoid triggering a UK capital gains tax charge. BASC would also receive representation on the enlarged trust’s board.

JUSC is run by portfolio managers Don San Jose, Dan Percella and Jon Brachle, who draw on more than 70 analysts in the U.S. and 130 globally. The companies said JUSC has beaten its benchmark in 75% of rolling three-year periods since the managers took over.

The announcement acknowledged that JUSC’s emphasis on high-quality companies has lagged a market that has favored stocks tied to themes such as artificial intelligence, cryptocurrency and quantum computing, as well as high-volatility shares. JPMorgan and the JUSC board said they remain positive on U.S. small caps, citing broadening earnings momentum in banks, industrial real estate, transportation, capital equipment and analog semiconductors.

The deal remains subject to final agreement and shareholder approval.