Shares in Alliance Trust, we are told, are the sort of thing that gets passed down from generation to generation; much like a Patek Philippe or the Grandparents’ silver teaspoon collection. Another thing that gets passed down is complaints about the trust’s performance and the ensuing promises of better to come.
So, what has been the problem this time? Well, according to Elliott Associates it is more of the same:
persistent underperformance of Alliance Trust’s investment portfolio against its sector peers and relevant benchmarks; the high and inflexible nature of the cost of the trust’s internal investment management function; and the continuing losses in two operating subsidiaries, adding to the total costs borne by shareholders.
Performance and that famous discount
According to Trustnet, the cumulative performance (NAV) over the last five years has been +52.5, while the Global benchmark achieved +58.6. The fees are also relatively high for the sector (0.72%), without being outrageous (see RIT capital’s 1.25%). The discount has come in from -19% five years ago to -13% now. The AT Savings and Investments subsidiaries have also managed to rack up over £50m of losses (and counting).
On all fronts it would appear that Alliance Trust has room for improvement, to put it mildly. So why is it so fiercely resistant to Elliott’s proposals and appeal for new blood? Elliott is the Trust’s biggest shareholder and has been building its stake since 2010, so it is hardly a Johnny-Come-Lately and surely more than entitled to voice its suggestions. Anyway, my money will be on Alliance Trust to carry on as before; it is peerless when it comes to defending its position and making promises.
Best intentions (2008)
Here is an extract from one of Katherine Garrett-Cox’s earliest interviews as CEO where she identifies her earliest goals:
To be recognised as one of the smartest investors within our domestic market. That is achievable over the medium term, but we have to make sure that the sum of the parts is truly working. We have to do what we can to narrow the gap between our NAV performance and that of the share price. We need to ensure that our financial services grow, and grow profitably.
(taken from with Alliance’s in-house magazine, Investor Autumn ’08)
Promises, promises (2010)
By 2010 Garrett-Cox was apologising for ‘pedestrian’ performance while vigorously resisting calls for buy-backs due to the persistent discount. There were a number of private client stockbrokers ‘very, very unhappy with the ‘arrogant attitude’ of the Alliance Trust and demands from analysts, stockbrokers, and shareholders for regular buybacks.
Personal Assets Trust (2006 – 2010)
Personal Assets Trust built up a stake and attempted to push Alliance to eradicate its discount (as PAT itself does). But PAT, with its mildly cross sheep style was never going to get far and, sure enough, didn’t. They wrote this about the stake they held in Quarterly 58:
At 30 April 2009 we held 9.6% of our shareholders’ funds in the shares of Alliance Trust. We have entirely sold out of our Alliance holding, not too unprofitably but nevertheless with deep frustration and disappointment.
The holding was originally bought by Ian in 2006 as Second Alliance and, after Alliance and Second Al- liance merged, was added to considerably by Ian and then by the Board before the appointment of Troy as Investment Adviser. We saw it as an alternative to a FTSE 100 Future which paid us a reasonable level of income while giving us mainstream equity exposure, and we looked to a possible significant uplift in its share price from a narrowing of the discount.
Troy also held a sizeable stake in Alliance Trust and together we did our best to persuade the Alliance Board to do something about the level of the discount. Ian and I were long-term admirers of Alliance and wanted it to do something similar to what Personal Assets has done in the way of a discount control mechanism. Sebastian felt the same. However, repeated requests to the Alliance Board and meetings with key personnel produced no result and in the end we got fed up and sold. This was a matter of huge regret because Alliance has a wonderful franchise among private investors and would have wonderful growth prospects were it prepared to adopt a discount control mechanism. Since many of those at the AGM were also Alliance shareholders (and, in fact, Alliance is one of my own largest holdings other than Personal Assets) it was at least an opportunity for some frustrations to be aired and shared during and after the meeting
Laxey Partners and rebellious shareholders
Laxey Partners accumulated a small stake (1.7%) and, in late 2010, wrote to the board to request that it impose an automatic discount control mechanism. The following year it suggested that Alliance outsource its fund management process, due to its serial underperformance. Result? Both “threats” were seen off.
I love that quote that women are a bit like teabags. You find out how strong they are when you put them in hot water. I really like that because I think for all of us we learned how to fight.
I don’t understand why either of these suggestions were considered threats. Why should a trust not attempt to ensure that departing shareholders secure a fair price for their holdings? If it underperforms then demand for its share will of course drop, but should departing shareholders be doubly penalised? Secondly, why attempt to run a global equity fund management process in-house, if the expertise or scale is lacking? This is unusual in the world of global investment trusts and, especially in the case of an underperformer, hardly something worth fighting so vigorously to maintain.
It was reported at the time that Aberdeen Asset Management was interested in taking over the external fund management but, alas for shareholders, that was not permitted. The Daily Mail reported on the testy annual meeting of May 2011 at which no lesss than a third of shareholders voted against the Board and told of more promises by Garrett-Cox to haul the trust away from its mid-table mediocrity:
Our performance was in the fourth quartile when I joined. We’ve now climbed to the middle of the pack and rest assured we are determined to continue climbing,’ she says.
Simon Elliott, head of Investment Trust research at Winterflood Securities commented:
Many long-term shareholders are unhappy with the fund’s long-term performance record and questions are increasingly being asked about the validity of the subsidiary businesses
Er yes, those subsidiary businesses
On the subsidiaries
As mentioned above, in addition to buying bonds and shares on behalf of its shareholders, Alliance Trust also operates savings and investment subsidiaries. There were high hopes for these, initially, and here were the Chairman’s comments, taken from the Trust’s In-House magazine in the Autumn of 2008:
Over the long term we expect our wholly owned subsidiaries, which represent a small proportion of the portfolio at the moment, to produce a substantial return on the capital invested. We also expect these to contribute additional revenue to the Company.
Six years and £50m of losses so far so far but, yes I know, Alliance Trust thinks long-term. Maybe it will even become Scotland’s answer to Fidelity?
It will be interesting to see how the Elliott challenge plays out but if Alliance prevails and is allowed to continue more or less as before, then perhaps its shareholders should consider swapping their shares for an index tracker and passing that down to the next generation instead.
Disclosure: Not long Alliance Trust.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.