Alliance Trust faces fall from FTSE 100

ALLIANCE Trust is tipped to lose its position in the FTSE 100 index as pressure mounts on the firm to narrow the discount between its market capitalisation and the value of its assets.

Analysts have calculated that the Dundee-based trust yesterday ranked 112th in terms of its 2.4 billion market capitalisation, which sets it strongly in the relegation zone when the index's constituents are assessed in March. If the firm's share price continues below 110 in the rankings, it will be replaced by another firm, reducing the number of Scottish FTSE 100 firms to six.

The shift down the ladder to the less-distinguished FTSE 250 puts pressure on the board of the trust to boost its share price through a share buy-back.

Although the firm bought a small tranche of its own shares on Friday, activist investor Laxey Partners is lobbying for Alliance Trust to adopt a "hard" discount control mechanism where it buys back shares whenever the discount falls to 10 per cent, which the board currently rejects. The discount stands at about 16 per cent.

Oriel Securities analyst Iain Scouller said: "Although it is possible that the shares will move back to be ranked 110th or higher in the next three weeks, the trust is likely to remain vulnerable to losing its FTSE position at some point this year."

But analysts were mixed about the severity of the impact on Alliance Trust shares of losing its place on the FTSE 100 index, where it has been since February 2008. Scouller argued that a sell off by FTSE 100 tracker funds could widen the discount further.

Simon Elliott of Winterflood estimated that trackers account for about 7 per cent of the Alliance Trust shareholder register, but that there would be both sellers and buyers. "They are on the threshold of dropping out. Will it have an effect on share price? It could do," he said.

Stephen Peters, an analyst with broker Charles Stanley, argued there will also be buyers of "fallen angels".

He said: "I don't think it makes any difference at all. It is just a prestige thing. You just get your name on the board."