Conclusion of Strategic Review - Proposed Changes

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30 November 2016

BlackRock Income Strategies Trust plc (the "Company" or "BIST")

Proposed change of investment objective and policy, intention to appoint Aberdeen Asset Management and a proposed Merger with Aberdeen UK Tracker Trust plc

Further to the Company’s announcements made on 1 August and 28 September 2016, the Board of Directors (the “Board”) has now completed its strategic review. As part of that review it has undertaken a detailed analysis of the Company’s investment performance and attribution since its move to a multi-asset portfolio in February 2015. It has carefully considered the Company’s investment objective and policy, as well as the level and structure of its gearing, in the light of current market conditions, has consulted with numerous shareholders and has also sought and considered a number of proposals from other investment managers.

Having concluded this review process the Board has agreed heads of terms with Aberdeen Asset Management (“Aberdeen”) and Aberdeen UK Tracker Trust plc (“AUKT”) to propose the following changes to the Company:

• Appointing Aberdeen's Diversified Multi-Asset team, with Mike Brooks and Tony Foster as new lead portfolio managers;

• Significantly enlarging the assets of the Company by a merger with AUKT and renaming the newly combined company Aberdeen Diversified Income and Growth Trust plc (“ADIGT”);

• Managing ADIGT under a diversified multi-asset strategy with a change in investment objective to target returns of LIBOR+5.5 per cent. per annum (net of fees) over rolling five-year periods;

• Revising the dividend policy to include a reduction in the current dividend level that recognises the current low yield environment; and

• Replacing the current zero discount policy with a more flexible approach that recognises the constraints imposed by gearing and by the more illiquid nature of the future portfolio.

As part of the overall changes, the Company will also be making a tender offer for up to 20 per cent. of the shares in issue at a tender price equal to NAV (cum income, debt at fair value) less 4 per cent. and the costs and expenses of the tender offer.  The tender offer will be subject to shareholder approval and inter-conditional on shareholder approval of the change in investment objective and policy and the merger.

Appointment of Aberdeen Asset Management

The Board is pleased to appoint Aberdeen Fund Managers Limited as the AIFM, conditional on relevant regulatory approvals and finalisation of the terms of the formal management agreement.  The Company intends to continue its multi-asset investment strategy and will be managed by Aberdeen's Diversified Multi-Asset team.  The Board takes confidence from:

• the breadth and depth of resources of the Diversified Multi-Asset team;

• their track record and capabilities in this area;

• Aberdeen’s continued commitment to the management, support and promotion of investment companies; and

• the competitive cost level at which these investment management services will be provided to ADIGT.

The Company’s new lead portfolio managers will be Mike Brooks and Tony Foster.  Mike Brooks is the Head of Aberdeen’s Diversified Multi-Asset team and is the co-lead manager of the Aberdeen Diversified Growth Fund. Mike joined Aberdeen in 2015 from Baillie Gifford and has 22 years of investment experience. Tony Foster is a Senior Investment Manager in the Diversified Multi-Asset team and joined Aberdeen in 2014 following the acquisition of Scottish Widows Investment Partnership.

Aberdeen currently has assets under management of approximately £312 billion with approximately £90 billion managed in multi-asset mandates. The Aberdeen Group manages over 90 investment companies and other closed-ended funds representing approximately £17.9 billion of assets under management, of which 19 are listed in London with a total AUM of £6.7 billion (all figures as at 30 September 2016).

Aberdeen’s appointment will become effective upon termination of the Company’s existing management arrangements with BlackRock Fund Managers Limited, which has been served protective notice.  An announcement of the termination date is expected to be made in January 2017.

Aberdeen will be paid an annual management fee of 0.5 per cent. of net assets up to £300 million and 0.45 per cent. on the net assets above £300 million. This contrasts with the existing annual management fee of 0.4 per cent., payable on gross assets.

Proposed Merger with Aberdeen UK Tracker Trust plc

Under the heads of terms, the Board has agreed a future merger with AUKT to be effected by way of a scheme of reconstruction under Section 110 of the Insolvency Act 1986 and a voluntary winding up of AUKT (the “Scheme”). 

Under the Scheme, which is to be recommended by the Boards of both companies, AUKT qualifying shareholders will be able to elect to receive new shares in ADIGT and therefore an exposure to a multi-asset strategy and/or cash. The cash exit offered to AUKT shareholders as part of the Scheme will be limited to 40 per cent. of the AUKT shares in issue. The Formula Asset Value (“FAV”) of the new ADIGT shares will be calculated on the basis of NAV (cum income, debt at fair value) as at the calculation date less the costs of the Scheme (as reduced by the contribution from Aberdeen as set out below).  AUKT is expected to transfer a portfolio of cash and cash equivalent investments to ADIGT under the Scheme.

The Boards of BIST and AUKT have agreed that the Board of ADIGT will comprise four directors from the current Board of BIST and three directors from the current Board of AUKT.  James Long will continue as Chairman and Kevin Ingram (current Chairman of AUKT) will become the Senior Independent Director of ADIGT.  Lynn Ruddick and Jimmy West have agreed to not stand for re-election at the next BIST annual general meeting, subject to shareholder approval of the Scheme.

The merger has a number of benefits for BIST shareholders:

• Significantly increasing the size of BIST’s asset base, while simultaneously reducing the current gearing level. AUKT had net assets of approximately £331 million as at 28 November 2016;

• Improving the liquidity of the BIST shares on the secondary market to benefit all shareholders as BIST will become a larger Company with more shares in issue;

• Introducing new investors into the Company; and

• Spreading the Company’s fixed costs, such that the ongoing charges ratio of ADIGT should remain substantially unchanged from that of BIST today.

The merger is conditional on regulatory and tax approvals being obtained and will be subject to approval by both BIST shareholders and AUKT shareholders.

The Company and AUKT will each pay for its own costs of implementing the Scheme.  Aberdeen has agreed to make a contribution to BIST in relation to its costs of implementing the Scheme, thereby significantly reducing the costs of the scheme for existing BIST shareholders. 

Amended Investment Objective and Policy

The Board, in consultation with Aberdeen, proposes to adopt a new investment objective to target returns of LIBOR+5.5 per cent. per annum (net of fees) over rolling five-year periods. 

The current investment objective of the Company is: “over the medium term (5 to 7 years), to aim to preserve capital in real terms and to grow the dividend at least in line with inflation” and to “target a total portfolio return of UK Consumer Price Index ("CPI") plus 4 per cent. per annum (before ongoing charges) over a 5 to 7 year cycle.”

The Board has concluded that seeking to deliver this objective with an acceptable level of risk is imprudent in the current market conditions and hence, in conjunction with Aberdeen, decided upon the proposed changes.

Alongside the change in investment objective, the Board will also adopt a new investment policy, which targets a truly diversified multi-asset approach to generating highly attractive long-term income and capital returns.   The focus of ADIGT will be on delivering greater capital stability over the medium term than a long-only equity strategy and with volatility significantly less than that of equities.  The portfolio will include, but is not limited to, listed and unquoted equities, property, social and renewable infrastructure, emerging market bonds, loans, asset-backed securities, insurance linked securities, private equity, farmland and aircraft leasing. This builds on the experience and success of Mike Brooks and Tony Foster with similar open-ended portfolios but with the added benefit of being able to access, in an unconstrained approach, the entire asset class spectrum utilising the closed-end structure to its best advantage. It also fully harnesses the breadth and depth of Aberdeen’s resources across a wide range of traditional and alternative asset classes, through a simple and transparent approach.

The Board and Aberdeen believe that this diversified multi-asset approach will be an appealing proposition to a wide range of investors, reinforced by the growth over the last ten years in the Investment Association’s ‘Mixed Asset’ sector with funds under management growing from £55.4 billion to £177.1 billion (to September 2016 – source: Investment Association).

The proposed changes to the investment objective and policy are subject to FCA approval and approval by BIST shareholders.

Dividend Policy

Since the implementation of the existing objective and policy in February 2015, there has been a significant change in market conditions and an overall decline in the yield of many investments, notably instruments issued by governments (including gilts). In view of this change and having considered the increase in risk to capital of continuing the current dividend level (6.54 pence for the year ended 30 September 2016), the Board proposes to adopt a new dividend policy outlined below.

The intention is to pay an interim dividend of at least 1.635 pence in respect of the quarter ending 31 December 2016 (a dividend of 1.635 pence was paid for the quarter ended 31 December 2015).  In addition, the Board intends to declare a further dividend for the period from 1 January 2017 to the date of the implementation of the Scheme, prior to the Scheme becoming effective and thereafter to reduce the subsequent quarterly dividends by an amount equivalent to an annualised cut in the dividend level of approximately 20 per cent.  

The revision of the investment objective together with the rebasing of the dividend as proposed will allow the Company to pay an attractive dividend consistent with the strong underlying portfolio yield, payable on a quarterly basis.  The Board believes that the new dividend yield together with the aim to target total returns with lower volatility will continue to be appealing to existing shareholders, the shareholders of AUKT and future investors.

In line with good corporate governance the Board will continue to put the Company’s dividend policy forward for shareholder approval at its annual general meetings.

Tender Offer

Prior to the date on which the Scheme becomes effective, the Company will propose a tender offer for up to 20 per cent. of its ordinary shares in issue (excluding any shares in treasury) at a tender price equal to NAV (cum income, debt at fair value) less 4 per cent. and the costs and expenses of the tender offer. The tender offer will be available to all existing BIST shareholders except those in Restricted Territories.  

The tender offer will be subject to shareholder approval and inter-conditional on shareholder approval of the change in investment objective and policy and the merger.

Discount Control Policy

Prior to the strategic review, the Board had been implementing a nil discount control policy through share buybacks at a discount to NAV. In the year ended 30 September 2016 the Company purchased 7.6 million shares pursuant to this policy.

Having reviewed the investment objective and policy and as part of its overall strategic review, the Board has decided not to continue with a nil discount policy. Where appropriate the Board will consider implementing share buybacks to provide liquidity to shareholders from time to time and other forms of discount control deemed to be appropriate at that time, taking into account the more illiquid underlying portfolio mix.

Gearing

Under these proposals it is the Board’s current intention to retain the existing 6.25 per cent. bonds 2031, valued at fair value.

BIST Shareholder Support

Aviva Investors Global Services Limited, acting on behalf of certain of its underlying clients which have appointed it as investment manager, have indicated an intention to support the proposals and to vote, or procure the vote, in favour of the proposals at any relevant general meetings of shareholders of both BIST or AUKT on behalf of the entire holding of shares over which they exercise control as discretionary investment manager.

Expected Timetable

It is currently envisaged that a shareholder circular, prospectus and notice of general meeting setting out details of the Scheme, the proposed new investment objective and policy and seeking shareholder approval for the tender offer will be sent to shareholders with the Annual Report and Accounts and notice of Annual General Meeting in January 2017.

The General Meeting to approve the proposals is expected to be convened in March 2017.

The Scheme will be conditional on, amongst other things, the recommendation of the Boards of both companies, the necessary shareholder approvals by the shareholders of both companies and the appropriate regulatory, notably FCA, and tax approvals in due course.

James Long, Chairman, commented:

“The Board is disappointed with the performance for shareholders over the past 19 months. The negative absolute returns delivered, coupled with our concerns over the sustainability of the dividend in the current low yield environment, led us to initiate the strategic review that we have now concluded.  Our comprehensive review has re-affirmed our conviction that a well-managed multi-asset portfolio within an investment trust structure is an attractive proposition for shareholders and is highly relevant in the pensions and savings market.

We believe that the appointment of Aberdeen, with its proven multi-asset and promotion capabilities, the restructured investment portfolio designed to deliver an attractive investment objective and dividend policy and the enhanced scale of your Company as a result of the merger will make your re-shaped Company a distinctive, relevant and strong proposition for both sets of shareholders and for future investors.

We very much look forward to working with Aberdeen to deliver the performance that shareholders have a right to expect”.

For further information, please contact:

Cenkos Securities

Will Rogers                          020 7397 1920
Sapna Shah                         020 7397 1922
Alan Ray                              020 7397 1916
Oliver Packard                     020 7397 1918

Aberdeen Fund Managers Limited

William Hemmings           020 7463 6223

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.  Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.