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Magellan Global Trust (ASX: MGG) aims to improve the liquidity and value of its offering through an unorthodox plan announced today, bringing three funds under the one roof with a $15.6 billion trust.
If approved by regulators and shareholders, the proposed restructure would involve the Magellan Global Fund (MGF) acquiring Magellan Global Equities Fund (MGE) and Magellan Global Trust (MGG) on a net asset value (NAV) equivalent basis.
Management is aiming to host unitholder meetings in the fourth quarter of this calendar year, with all transaction costs to be paid by Magellan Financial Group (ASX: MGF).
Upon completion, MGF will fund discounts for shareholders to take up a 1-for-4 entitlement offer and bonus options as part of a capital raising planned for January next year.
With a current value of $11.6 billion MGF is by far the biggest of the three funds, while MGG is worth $2.3 billion and MGE is valued at $1.7 billion.
Magellan chair Hamish Douglass (pictured) said post-restructure there would be one trust with both closed and open class units; the latter including a hybridisation that is also in Magellan's Airlie managed fund (ASX: AASF) whereby units can be traded either off or on the stock exchange.
"We believe that by establishing a single trust of both open and closed units, it creates the opportunity to have very low risk between the units - what is known as basis risk - and we believe this is going to heighten the trading price of the closed-end units," Douglass said in a recorded presentation today.
CEO Dr Brett Cairns highlighted the restructuring took into account the importance of scale.
"The larger the trust, the better the trading environment. I think that's very clear in the ASX," he said.
"There's no effective basis, there's no real difference in the underlying portfolio exposure of the closed ended units and the open ended units."
However, he said there would likely be arbitrage opportunities between the open and closed ended units. For example, he explained if the latter deviated from the net asset value then someone could effectively short the open ended units at par, and use that money to buy the same exposure at a discount.
He said the restructure would create a kind of "gravity" that pulls the unit price towards net asset value, and Douglass reiterated the point by explaining market participants like hedge funds could take part in risk-parity trades.
"We are almost creating the perfect environment for market participants to trade that discount and make money out of it which will tighten the spread, plus we've got natural demand for our units," Douglass said.
"To enable a very low-risk, effectively risk parity trade purely on a discount is unique. It really has never been done in this sort of closed end world for managed funds before."
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