Alliance Trust battle lines drawn

Alliance Trust's annual general meeting in Dundee on 29 April should be a lively affair.

Activist investor Elliott Advisors, which has become the trust's largest shareholder with a stake of more than 12%, has nominated three City heavyweights as non-executive members of the board (although there is currently only one vacancy following the resignation of Win Robbins in February).

Elliott claims that on numerous occasions since 2010, when it started building a stake in the 127-year-old trust, it has attempted to engage the trust's board about the performance and governance of the £2.8 billion global generalist. Its requisition request is because it is dissatisfied with the responses.

Poor governance 

The hedge fund is particularly critical of last September's internal appointment of Peter Michaelis as its new head of equities, following the resignation of his predecessor Ilario Di Bon after a period of uninspiring performance. The appointment was announced along with a fresh emphasis on socially responsible investment (SRI).

"The post was filled without prior notice, through internal promotion without advertisement, without inviting external proposals, and without canvassing shareholder views," says Elliott in a letter to shareholders.

It adds: "Whereas other investment trusts have successfully negotiated reductions in asset management fees in recent years, the administrative costs of Alliance Trust have doubled under the present executive management."

Elliott also takes issue with the fact that chief executive Katherine Garrett-Cox (pictured) has been in her post longer than any of the current non-executives.

That in itself doesn't strike me as something to get overly exercised about, but as this column pointed out two months ago, she is the fourth best-paid investment trust boss, earning £1.39 million last year. That's bettered only by the heads of private equity giants 3i and SVG Capital and Lord Rothschild, chairman and majority shareholder of RIT Capital.

Has Garrett-Cox led Alliance well enough to earn her keep? Arguably the trust has not upped its game sufficiently since it defeated hostile resolutions from Laxey Partners in 2011 and April 2012.

Since then, according to figures from JPMorgan Cazenove, the net asset value total return has been 38.4%, slightly lower than the wider peer group average. Yet its larger and more comparable global peers have delivered an average 47.9% gain.

Discount troubles

However, it is the persistently wide share price discount to NAV that is proving irksome, and presumably this is where Elliott sees a potentially significant short-term gain should shareholders back its nominations to the board.

The discount was 15.8% when the last attack was defeated in 2012, and had narrowed a little to 14.5% before Elliott wrote to shareholders on 16 March (it is currently 13.3%). That compares with an average for the AIC global sector of 6.8%, and a 4.7% average for comparable peers Scottish Mortgage, RIT Capital, Foreign & Colonial and Witan.

A back-of-an-envelope calculation suggests getting the discount down to that level could net Elliott around £24 million at current prices. Private investors need to bear the motives for Elliott's stakebuilding in mind, should its requisition request make it on to the agenda. Whether or not it does, Alliance's board will be aware that Elliott is a problem that is not going to go away.

Significant stakes in the trust held by private client wealth managers such as Rathbones, Brewin Dolphin and Investec add interest to the mix. One industry source tells me that traditionally it is difficult to get these shareholders to agitate against an incumbent board, but there is currently "a decent amount of frustration about long-term performance from a number of holders".

Judging from letters to Money Observer in recent years, those frustrations are shared by some of the trust's 50,000-odd private investors. And here I must declare an interest, as I have recently become one of them.

Elliott's proposal is not as threatening or aggressive as Laxey's attack and I agree with its assertion that the appointment of three "independently vetted" non-executives to the board will bring "added expertise, experience and a fresh perspective".

I believe most shareholders would welcome a shake-up at Alliance, not least to address any perception that the interests of the board's executive incumbents trump those of its shareholders.

Whatever the outcome at the AGM, Alliance Trust investors could be due a welcome pick-up in relative performance. That could be in the form of a more aggressive dividend policy, a marked turnaround in the performance of its loss-making subsidiaries (Alliance Trust Investments and Alliance Trust Savings) and sustained improvement in the trust's equity portfolio versus comparative peers.

All of these could help to narrow the discount which, as JPM Cazenove points out, "remains the trust's Achilles' heel". The chart shows it is stubbornly high.

But I don't think that is enough. For many of the reasons that are behind Elliott's requisition request, I would like to see Alliance dragged out of its self-managed eyrie in Dundee and into the modern 21st century world of investment trusts. The appointment of Anthony Brooke, Peter Chambers and Rory Macnamara to the board would boost the chances of achieving that aim.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.