The past five months have been eventful times for Alliance Trust, and the dust has not yet settled.

The £2.4 billion giant has struggled to improve performance since Katherine Garrett-Cox took the helm in 2008, and critics contend part of the problem is the management’s resistance to the introduction of a discount control mechanism (DCM) to limit its persistently wide discount to net asset value. 

Over recent months, Alliance has been the target of a campaign by hedge fund manager Laxey Partners, which owns 1.7 per cent of shares, to adopt a DCM targeting a 10 per cent discount to NAV. Laxey has also called for an end to the so-called ‘scaling up’ of voting rights of the Alliance Trust Savings Scheme, which means that the uncast votes of ATS members are allocated in proportion to those cast – a practice Laxey says is open to abuse. 

In January, Laxey tabled resolutions on both these issues for May’s AGM and lobbied shareholders for support.  

Investors have waited with interest to see how Alliance would respond to the activists’ demands. Following consultation with shareholders, Alliance has bought back shares on several occasions since February, and Garrett-Cox now claims that buybacks are ‘part of the company’s DNA’. 

A full response came in mid-April with publication of the annual results for the year ending 31 January. In the attached note to shareholders, the board announced that, although it does not accept Laxey’s criticisms, it will stop the scaling up of voting rights.

There is less clarity over discounts. The board rejects the proposal for a formal mechanism, maintaining that: ‘Investment performance is the key driver of the company’s share price in the long term, not the imposition of an arbitrary discount level set through a rigid DCM policy.’ 

A rigid mechanism, it insists, could push up the total expense ratio, because costs would be spread over a smaller asset base and affect performance, and because the portfolio would have to be managed on a shorter-term basis. Instead, it ‘remains committed to enhancing returns through… its flexible share buyback policy’. 

The board also argues that performance is improving. But while the trust has done better over the past year, it has hardly set the global growth sector on fire. A share price total return of 19 per cent over the year to the end of January put it in 24th place in the global growth sector. Broker Oriel Securities points out that ‘it is currently 18th out of 36 on three-year NAV total return numbers’, putting it firmly mid-table. The discount was knocked by relegation from the FTSE 100 in March, but has since come in a little, to 15.5 per cent. 

Simon Elliott at Winterflood Securities describes performance as ‘unexceptional’. ‘We remain unconvinced about the fund’s ability to outperform its peers on a sustained basis,’ he adds. 

The final outcome of the discount control discussion remains very much in the air. John Newlands, head of investment companies research at long-term shareholder Brewin Dolphin, suggests that this spring’s opportunist share buybacks may have helped Alliance ‘conquer its fears’ about becoming more active in this way. 

‘The big question now is how far it is prepared to increase the frequency of share buybacks,’ he says. ‘I’d like it to introduce a formal objective of bringing the discount in towards 10 per cent within, say, three years, without committing itself to how or when it’ll achieve that.’ 

Brewin will meet with Alliance again before the AGM for further discussions.

And what of Laxey’s resolutions? The general view is that the activist does not currently have the firepower to push through the DCM resolution.