Aberdeen UK Smaller Companies Growth Trust plc (AUSC) has announced a “proposed reconstruction and rollover” into JPMorgan UK Small Cap Growth & Income plc (JUGI).

“The boards of AUSC and JUGI are pleased to announce that heads of terms have been agreed for a combination of AUSC and JUGI,” said the Aberdeen fund.

“The combination is the culmination of a competitive private review process undertaken by the AUSC board, which both boards believe offers the best outcome for AUSC’s shareholders as well as delivering meaningful benefits for existing JUGI shareholders.

“The board of AUSC regularly evaluates both the company’s performance and the attractiveness and appeal of the company to investors.

“The board is conscious that over the last five years the company has bought back more than half of its issued share capital, which has been essential to limit the discount and discount volatility.

“Whilst this has been in the best interests of shareholders, it has significantly reduced liquidity in the company’s shares and the board is concerned about the impact that ongoing share buybacks are likely to continue to have on the size and scale of the company, the liquidity in the company’s shares and the company’s ability to appeal to investors and grow over time.

“The board has negotiated the investment management fee down on two occasions in the past few years, resulting in a reduction in the ongoing charges ratio (OCR).

“However, as a result of the continuing buyback this improvement in the OCR will be difficult to sustain with the OCR expected to rise in the current financial year, further reducing the company’s attractiveness when compared to its peers.

“Investment performance has also been challenging for a significant period during which time the board, working with its investment manager, has robustly assessed and challenged the company’s portfolio managers and their investment process which has resulted in some changes in approach.

“Despite this, recent performance remains below both the benchmark and a number of similar peers limiting the appeal of the company to potential investors.

“Accordingly, the board decided to undertake a private review of the company’s management arrangements and invited proposals from a targeted selection of candidates, including its incumbent manager.

“Following a detailed request-for-proposal (RFP) process the board has agreed terms of a combination of AUSC and JUGI to be implemented through a proposed members’ voluntary winding up of the company by way of a scheme of reconstruction of AUSC under Section 110 of the Insolvency Act 1986.

“Pursuant to the Scheme AUSC shareholders will be entitled to receive new shares in JUGI or to elect some or all of their shares for cash, subject to an aggregate limit of 35 per cent. of AUSC’s share capital. The Scheme and the issue of New JUGI Shares are, together, the ‘Proposals’.

“Following implementation of the Proposals the enlarged JUGI will continue to be managed by JPMorgan Funds Limited (which has delegated the management of the company’s portfolio to JPMorgan Asset Management (UK) Limited, together ‘JPMF’) in accordance with its existing investment objective and policy.”

Liz Airey, chair of Aberdeen UK Smaller Companies Growth Trust, said: “I am delighted that we can offer our shareholders the opportunity to rollover their holdings into an investment trust with exceptional long-term performance within the UK Smaller Companies sector.

“Those who elect to do this will also benefit from holding shares in a larger, and so more cost efficient, company which should offer better trading liquidity.”

JPMorgan UK Small Cap Growth & Income chair Katrina Hart said: “We are delighted to announce a proposed combination with AUSC following a competitive process. This partnership will create an enlarged company that delivers meaningful benefits for both sets of shareholders, including improved market liquidity and a reduction in our ongoing costs ratio.

“JUGI makes good use of the investment trust structure through gearing and its enhanced dividend, while the long-term performance record of its experienced management team is compelling. This is JUGI’s second consolidation in the last three years and the Board’s ambition is that JUGI is recognised as the pre-eminent investment trust investing in UK smaller companies.”