Bill Jamieson: Testing times for Alliance’s Katherine the Great

IS THE world falling apart for Britain’s most photogenic chief executive, Katherine Garrett-Cox? Why is she so out of favour in the investment world?

Garrett-Cox is head of Alliance Trust, one of Scotland’s largest companies by market capitalisation. It can certainly claim the largest private shareholder following: investment has been its business for generations. But now, as if the eruption of a public row over performance and stewardship – the second in two years – is not sufficiently concerning, the prospect of a hostile approach from rival Aberdeen Asset Management (AAM) compels wide attention.

Laxey Partners, an investor activist group speaking for 1.7 per cent of Alliance’s shares, has accused Garrett-Cox and the board of lacklustre performance and misleading shareholders about the expenses of the business. It has tabled a motion for the annual meeting on 27 April calling, inter alia, for the board to concentrate on improving performance and to consider outsourcing the fund’s investment management. Separately, AAM has indicated it might be open to this opportunity. Broker Speirs & Jeffrey has questioned the future of Garrett-Cox and talk is now growing of a hostile bid.

How has a £2.1 billion investment trust, famed for its defensive, conservative approach to equity investment – qualities that have swung back in to favour in recent years – found itself under such attack? And why has a trust with an impressive record of sustained dividend growth failed to rally support among the industry analysts and commentators who set such store by long-term dividend performance?

Indeed, arguably the most striking feature of this remarkable row has been the cool response to the board’s plea for support. This coolness should itself be an issue of concern to the board, given the raison d’etre of the UK’s biggest investment trust to be the first port of call for hundreds of thousands of cautious-minded investors.

Alliance protests that its performance improved last year and that it is working to reduce the discount to net assets (still 15.2 per cent) by share buy-back. But two problems are glaringly evident. Progress has been slow and lacked urgency, considering the poor relative performance against both its own chosen global growth benchmark (underperforming over both three- and five-year periods) and especially against similar trusts such as AAM-managed Murray International (up 82 per cent against Alliance’s 12.7 per cent over the same period). Alliance has stuck with FTSE 100 dividend stalwarts; Murray has gone for top growth stocks in Latin America and Asia-Pacific.

But there is another concern: the continuing losses at Alliance Trust Savings (ATS) and ATI, the asset management business (to date, £50 million and £10m respectively). Despite continuing promises of turnaround, these have continued to put a brake on performance. What particularly raised eyebrows was an admission by Garrett-Cox that ATI would need to be managing third-party assets of £2.5bn to break even. Funds under management currently are £551m, of which just £125m is external money. So yet more losses are likely to stretch to the far horizon while the ATS business lacks presence in the personal finance arena.

Alliance may now be running out of time. Broker Winterflood is advising shareholders to take advantage of the buyback policy and exit. Broker Brewin Dolphin, claiming to speak for 5 per cent of Alliance shares held by clients, has expressed its admiration of AAM and is open to change. That may stick in the throat of some of Brewin’s more conservative clients who would look askance at a boarding party raid from a 1.7 per cent-owning group based in the Isle of Man and the possible entry of AAM which nearly broke the investment trust industry in the split capital trust debacle a decade ago. AAM’s Martin Gilbert said then he wanted out of the retail investment business. But amnesia among stockbrokers is an occupational hazard.

There is also a tendency to dismiss Alliance’s values as dull and boring, and the trust itself to be about as interesting as watching paint dry. This it should reject. Such critics might usefully reflect that with 45 years of dividend increases through recessions and inflation crises and now three bear markets in ten years, watching paint dry can be a deeply pleasurable experience.

This notwithstanding, Alliance gives the appearance of a strange reluctance to promote this landmark trust. If you are seeking to build a high-volume fund management platform you need a galvanising leadership and love of profile. Recent non-executive board appointments have been drawn in the main from the strychnine worlds of governance, compliance and regulation, rather than front-line investment experience. All this, and Garrett-Cox’s ice maiden persona, has worked to turn Alliance from being a radiator into a fridge.

If Alliance is to successfully fight off the challenge from Laxey partners, it needs to bite the bullet on its third-party investment management operations, publicly proclaim the trust’s aims and purposes and show the real leadership for which its top directors are handsomely paid. It has to prove it is more than a fractious battleground for groups of guys (or girls) in suits.