Bill Jamieson: Alliance should repel Elliott
A boarding-party raid of this type would not normally have commanded such widespread attention. But it has done so because Elliott Advisors is a significant shareholder in the trust, holding around 12 per cent of the shares, and because the issues it has raised have resonance.
There are three criticisms in particular. Elliott says the trust’s management charges and costs charges are too high; that chief executive Katherine Garrett-Cox and chair Karin Forseke are paid too much; and that the trust has been a serial underperformer.
A significant drag on revenue have been the two trading subsidiaries, and Alliance Trust Savings (ATS) in particular, which has accumulated losses of more than £50 million since launch.
Until this battle blew up, shares in Alliance had been underperforming both its main rivals and global indices. In particular its shares continue to trade at a glaringly wide discount to net assets – currently 12 per cent, more than double the average for the sector.
The Elliott nominees have attracted formidable support – from Institutional Shareholder Services, from shareholder lobby Pirc and from Tim Ingram, a former Alliance director who fired another highly critical letter on the trust’s management last week.
The board has taken none of this lying down. It has produced a forceful rebuttal, and I have also had an opportunity to speak with Garrett-Cox in the past few days.
Let’s take one issue off the table. The three nominees – Anthony Brooke (ex-Warburg), Peter Chambers (ex-Legal & General Investment Management) and Rory Macnamara (ex-Morgan Grenfell) – are not a posse of deadbeats that Elliott has just rounded up. They are successful and respected financial figures. But the problem here is they have not set out a clear programme of the changes they would intend to make or how they would effect these.
Alliance has claimed that Elliott, in previous meetings with the board, has suggested it might make a tender offer for shares – a move that would eliminate the discount but also the core modus operandi of Alliance Trust. Elliott has indicated it would sell ATS – but since most other fund trading platforms are trading at a loss, it is not clear who the buyer might be, still less the price. And it has given no indication of what dividend policy might be – assuming it considers that a dividend is a significant attraction for an investment company of this type. This is a glaring omission.
Alliance is able to cite a marked improvement in performance since the investment management was changed last year. There is no doubting the sharply improved performance over the latest one-month, three-month and six-month periods. Alliance is now in the top quartile of performers and the shares have recently been standing at an all-time high.
What accounts for this improved performance? Stock selection will have helped. But arguably the greatest benefit will have flowed from a less hyperactive investment style. Two years ago portfolio “churn” was running at between 40 and 50 per cent of the portfolio. That is now down to around 18 per cent. Shares in companies where the dividend was thought to be at risk were sold – two of these were in the energy sector, ahead of the slump in the oil price. Total holdings are down from 80 to 70, while weightings in healthcare and technology have been lifted. All this is to the good.
As for ATS, it is an increasingly popular facility for small investors and in particular it is attracting strong support from the IFA sector – a critically important theatre of business with the far-reaching changes in pensions legislation now kicking in.
Alliance has never pretended to be a shooting star performer. Rather, its appeal is to thousands of private investors looking for a vehicle that will give them some measure of stability both by way of capital growth and in dividend income while having regard to capital protection.
It is typically looked upon as a core holding around which other, more risky investments can be clustered. As such, it is seen to stand for a set of values to which many small investors relate and for that reason commands a formidable degree of trust. This is the core, enduring appeal of Alliance to a very large constituency and one I am not sure Elliott understands or “gets”.
It is also one that is circumspect about hedge fund boarding parties and would be averse to handing Elliott and its three nominees what is in effect a blank cheque.
The criticisms are well known and well made. But Elliott has not set out a clear, specific do-able agenda for improvement that does not rip out the heart of Alliance. There is no doubt about room for improvement at Alliance. But signing a carte blanche? My advice to Alliance investors is to vote against this boarding party.