As its annual general meeting approaches (Thursday), Alliance Trust, an investment company which is the largest and one of the oldest investment trusts in the UK, is back in the news. Based in Dundee, it is one of Scotland's biggest companies, though one of its lesser known – big enough to have been recently one of the UK's top 100 companies, a constituent of the FTSE 100 index.
The board of Alliance has been put on the defensive in advance of the AGM at the end of this month as activist shareholder Laxey Partners is once again pressing for changes in strategy. Quite why a hedge fund, whose interests tend to be eclectic and short-term, should be taking a close interest in Alliance Trust, the epitome of tradition and the long term, is yet to emerge. But this interest has been evident for more than a year.
Size – it has a market capitalisation in excess of £2bn – is a problem for Alliance Trust. It is too big to be beautiful and it punches below its weight. The ethos is long-term capital growth and a rising dividend – the dividend has now risen year on year for an unbroken period of 45 years. It does what it says on the tin: 'Investing for generations'. Many of the shareholders are individuals who have held shares in the trust over very long periods, even handed on from generation to generation. It has a tradition of unexciting stability, and over a period of decades the investment growth has been considerable.
The wide discount at which the share price stands in relation to the value of its assets – significantly greater than the average for other similar investment trusts – is a problem that has dogged Alliance for several years. It arises from the trust's huge size and insufficient demand for its shares. The lack of demand is a consequence of several factors such as not having a particularly prominent profile, being out of the radar of IFAs who operate on a commission-driven charging basis and having an investment performance record that doesn't attract the right kind of attention.
Another irritation for many is the continuing pattern of operational losses incurred by its subsidiary Alliance Trust Savings which some regard as an unjustified diversion from the main business of the company. ATS is, however, a significant and highly regarded player in the retail investment sector – a regular winner of national awards – and this probably does more to bring its parent Alliance Trust to the attention of the wider public than might be supposed.
In a year when markets have fallen, the trust has outperformed relative
to its peer group. What it now needs above all is a series of annual performances more in line with that achieved in 2011.
A wide discount margin in the share price is not generally a healthy sign. Not only does it signal a lack of demand for the shares, perhaps through lack of confidence in future prospects, it also leaves the trust vulnerable to predators. Until recently the board has eschewed share buybacks as a means of reducing the discount margin in the share price, preferring market demand to effect change. But over the past year there has been a programme of strategic buybacks amounting to more than 10% of the share capital. This was the plan adopted by the board rather than the more aggressive proposal for a discount control mechanism put forward by Laxey Partners which was not accepted at last year's AGM. Although this buyback programme has reduced the discount margin over the past year it has not resolved concerns fully as the margin still remains greater than that for other similar investment trusts.
In a year when markets have fallen, the trust has outperformed relative to its peer group. What it now needs above all is a series of annual performances more in line with that achieved in 2011.
And so we come to this year's AGM and Laxey has gone a stage further. It has submitted a motion calling on the board to carry out a comprehensive review including the possibility of 'externalising' the management of the company's investment portfolio. This would have major implications for the trust particularly as it has always been self-managed with its own in-house expertise and support infrastructure.
Lurking in the wings we have Aberdeen Asset Management which, according to some press reports, would be interested in taking over management of the trust's investment portfolio. AAM has flourished in recent years and manages the successful Murray International Trust; it has a track record investing globally. The downside that will resonate with Alliance Trust supporters is the role AAM played in the disgraceful collapse of split-level investment trusts a decade ago.
Some robust exchanges can be anticipated. At this stage the board is expected to have sufficient support to hold off the intrusion. It is certainly in a better position now than it was a few years ago when it seemed to lack a clear focus for its aspirations. The challenges it has are to ensure a repeat, year on year, of the improved investment performance achieved in 2011, for subsidiary activities to add value and to harness opportunities afforded by legislative changes in the way investment products are sold that come into effect at the end of 2012.
Douglas Wood is a chartered financial planner and former