The battle between Alliance Trust and Laxey Partners could be described as ending in a draw.

True, Laxey’s attempt to persuade Alliance shareholders to back its proposal to force the trust to introduce a formal target for its discount was voted down. But the scale of the rebellion – a third of investors voted in favour of the resolution at the annual general meeting – was large enough to persuade Alliance that some change
was needed.

While Alliance still insists that a formal discount mechanism would be a hindrance rather than a help, it has admitted that it needs to keep a careful eye on the gap between its share price and the NAV – net asset value, or the value of the assets in the trust. Indeed, it has actually set itself stricter targets than Laxey proposed. Alliance chief executive Katherine Garrett-Cox has pledged to get its discount to around the average for the global growth sector, currently about 8.6 per cent. Laxey simply wanted the trust to commit to buying back its own shares if the discount got above 10 per cent. 

Of course, this is simply an informal commitment and Garrett-Cox has deliberately not set herself any target date for getting into line with its peers. But she can be certain that, if she does not deliver relatively quickly, Laxey will be back – and shareholders may be more inclined to back a formal control mechanism if she fails to deliver on her informal pledge. 

She is already taking action: so far this year, the trust has bought back 2.7 per cent of its shares in its first-ever buy-back programme. That, combined with Laxey’s action, has helped push the discount down to 13.6 per cent – its lowest level in years, but still well above rivals such as Foreign & Colonial, Witan and Scottish Mortgage.

For the average investor, however, the performance of the trust is far more important than any buy-back programme, formal or informal. And Alliance still has some way to go on that front. While it insists that it has been showing signs of improvement, these are still very slight: over the past one, three and five years, it is firmly in the third quartile of the global growth sector, according to statistics from Trustnet. Alliance prefers to compare itself to a mixture of trusts from the global growth and global growth & income sectors, which brings it higher up the tables, but that is unorthodox, to say the least.

Garrett-Cox has made big changes in the way the trust is run since she arrived in 2007, initially as chief investment officer, becoming chief executive a year later. The portfolio has been dramatically slimmed down: six years ago, it had around 450 shares. With such a large number it was inevitable that, if one company was doing well, another couple were cancelling that out with a poor performance. Now, there are only around 200. The trust also uses gearing to enhance performance – and, with the weighted average cost of its debt currently just 1.85 per cent, it makes sense to use borrowing even if the funds are just parked in income-producing assets. Currently, it is around 11 per cent geared; Garrett-Cox has the power to increase that to 15 per cent without asking the board but it can go as high as 30 per cent. 

Asset innovation

One of the key innovations is the launch of its asset management subsidiary, which now has six open-ended funds – North America, Japan, Asia Pacific, Europe, UK and fixed income. That is similar to the make-up of the investment trust, although the latter also has a global portfolio, which includes large international companies. 

The aim of launching this subsidiary was two-fold: first, the trust hoped to bring in extra funds under management, and thus fee income. Second, and most important, it gives the fund managers themselves a public platform through which they can showcase their investment skills. The trust believes that has allowed it to attract managers who would not have been willing to be merely one of a team of managers under the leadership of Garrett-Cox. 

Recent new recruits include Fiona MacRae, who joined from Scottish Widows in 2008, Jonathan Bolton, a veteran of Schroders and Dresdner RCM, who heads the Asian desk, and a brand-new fixed income team, headed by Gareth Quantrill, poached from Scottish Widows last year. 

The performance of these specialist funds, which are effectively a mirror of the regional portfolios of Alliance Trust itself, is not that impressive. Only the Japan and Asia Pacific funds are ahead of their sector averages since inception, but these funds have just been repatriated from the area so the statistics have been reset and they do not even have one-year figures. The Monthly Income Bond fund has had a good start but, again, it does not have one-year performance statistics. The UK Equity Income, North American and European portfolios are all well behind their sectors.

Some analysts have also questioned the wisdom of Alliance retaining its investment platform, ATS or Alliance Trust Savings. This lost £5.4 million last year,  and, with a plethora of other fund supermarkets to choose from, it may always struggle to make a decent return. But Alliance believes ATS should help it take advantage of the opportunities for investment trusts that should arise from the introduction of the Retail Distribution Review (RDR), which outlaws commission payments to financial advisers from 2013. ATS already rebates any commissions it receives to investors, making it one of the few platforms which is already RDR-compliant. 

Alliance Trust may never want to be table-topping: its army of small shareholders mainly want an investment they can forget about, trusting the manager to make strategic and asset allocation decisions on their behalf. That means low volatility without big swings to the top and bottom of the tables. But the lacklustre performance of the trust and the specialist funds means Garrett-Cox has yet to demonstrate that her personnel changes and beefed-up asset management division can actually bring improved performance.

What the analysts say

Analysts had been growing impatient with Alliance’s failure to improve its performance or buy back its shares and they now hope that Laxey’s action will be the catalyst for real change. John Newlands, head of investment company research at Brewin Dolphin, held a ‘crunch meeting’ with Alliance ahead of the AGM at which he pressed the board to start buying back its shares. He is encouraged that the trust continues to do so, with some buy-backs most trading days, but he adds: ‘It could take some time to soak up demand from [shareholders] who have been wanting to sell for years but did not want to do so at such a big discount.’

Now, he says, the key is to get some momentum behind the performance which, if it happens, could transform its fortunes. But he points out that even after the big reduction in the number of holdings, it still has far more shares in its portfolio than rivals such as Scottish Mortgage – whose discount is only 11.3 per cent and has just 60 holdings.

Christopher Brown, investment company analyst at JP Morgan Cazenove, says: ‘We are giving Alliance Trust the benefit of the doubt given the many positive changes that Katherine Garrett-Cox has instigated since she took over as CEO and we believe that improved performance will narrow the discount over time. But in the meantime buy-backs will usefully enhance the NAV and thus shareholder returns.’

Charles Cade, investment trust analyst at Numis Securities, says Garrett-Cox has a clear strategy for improving the performance which, if it works, has the potential to narrow the discount further. 

Both Cade and Newlands are keen on the big international generalist trusts although, until there is evidence of a better performance from Alliance, think that other trusts offer better value at the moment. 

If, however, Alliance does keep its promise with a better performance and continued buy-backs, it could be worth buying in the hope of a significant narrowing of the discount.