Heather Connon investigates whether Alliance Trust's small improvement in performance will continue.

We will continue to focus on our key priority of improving the investment performance. So said Lesley Knox, chairman of Alliance Trust, at the annual meeting last May when Alliance fought off an attempt by hedge fund Laxey Partners to force it to introduce a discount control mechanism.

Yet there has been little sign of significant change. Over six months to 1 November, the fund’s change in net asset value (NAV) comes in 19th out of 33 global growth investment trusts, according to figures from Trustnet – still firmly in the third quartile. In share price terms, it has fared better, at 14th place in the rankings, but that reflects its active programme of buying back its shares.

Traditionally, the trust was one of the few to refuse to buy back its shares. The buyback programme is the main tangible impact of Laxey’s campaign, which attempted to force Alliance to keep its share price discount to the value of the underlying assets at a maximum of 10 per cent. Since May Alliance has bought back shares virtually every trading day: the total purchased now stands at more than 57 million, almost 9 per cent of its share capital.

That has been enough to narrow the discount to below 15 per cent compared with 18 per cent, and even higher, before the hedge fund’s interest. Assuming that programme continues – and Knox also said last May that it was ‘committed to the ongoing flexible use of share buybacks’ – it should keep the discount from widening to those levels again. But a significant narrowing of the discount towards – and ideally even below – the 12 per cent or so enjoyed by rivals such as Foreign & Colonial, Monks, Witan or Scottish Investment Trust, depends on a significant improvement in performance.

It has hardly been an easy period for the trust’s investment managers since the 2011 AGM. The slow-motion collapse of the eurozone economy has made a global slowdown almost inevitable and sent investors running for the shelter of UK gilts, German bunds, US Treasuries and gold. Stock markets have been volatile at best and even the most gifted fund managers have struggled to perform amid the global uncertainty.

Alliance Trust’s managers have yet to enter the realms of the gifted, however. In its latest half-year results, chief executive and chief investment officer Katherine Garrett-Cox boasted that the trust had ‘delivered consistent outperformance and total shareholder return of more than 3 per cent’.

But analysts at stockbroker Winterflood point out that the performance was boosted by the share buybacks. ‘Longer-term performance remains muted – it is broadly in line with comparable benchmarks over three years, while being behind over the longer term. However, the three-year performance numbers include a period around October 2008 when the fund significantly outperformed as a result of its defensive positioning. The fund now has a significant challenge in the next six months if the three-year relative performance numbers are to remain positive.’

John Newlands, head of investment company research at stockbroker Brewin Dolphin – who has been among the most vocal of those pressing for a better performance – says investors were ‘still waiting’.

‘There is no doubt that Alliance Trust has worked very hard to reposition its portfolio with far greater emphasis on Asia Pacific and emerging markets than before. However, we have yet to see signs of any significant outperformance,’ he says.

‘Should there be a useful rebound in the Far East then Alliance Trust appears well-placed to benefit from that. Until then, the wait goes on.’

Garrett-Cox has made significant changes to personnel and investment strategy since she arrived in 2007. The portfolio has been dramatically slimmed down from 450 to around 200 shares, including a new team on the Asian desk, a new fixed-income team and, most recently,  a new head of global equities, Ilario Di Bon, who joined from Fidelity Worldwide.

Evan Bruce Gardyne, head of investor relations at Alliance, thinks this appointment is one of the key changes for the trust. Di Bon’s new team – which includes three ‘young Turks’ from the Dundee office who have been sent to London to learn from an expert – will use an unconstrained approach for the global portfolio, in contrast to the previous strategy under which it was simply a collection of best ideas from the other parts of the portfolio. He will also be given ‘seed money’ by the trust to start a global fund, similar to the other Oeics described later.

In the interim results presentation, Garrett-Cox said five out of the six regional portfolios beat their benchmarks during the year. The sixth – North America – suffered from its bet against cyclical companies, which it viewed as overvalued. But, she says, it was well-positioned to ride the market turmoil after the trust’s year-end.
The UK remains its biggest geographic bet, accounting for almost a third of its assets, followed by North America, at around a quarter, Asia with 15.8 per cent and Europe with 13.7. The emerging markets, global and fixed-income portfolios make up the rest. Garrett-Cox is winding up Alliance’s private equity interests and says that the first four sales have been made at a profit.

In the UK portfolio, the trust is now pursuing three key themes: exposure to defensive growth, through companies such as GlaxoSmithKline; Asian growth, through miners BHP Billiton and Rio Tinto, and the Prudential insurance group; and individual high-quality companies, including Elementis and Carillion.

While investment in fast-growing Asian economies remains a key part of the strategy, it has reduced some of that weighting after a strong performance there, adding instead to its US exposure.  

Alliance has also introduced new open-ended funds, or Oeics, which will give managers a platform from which they can showcase their own performance, rather than being hidden as part of the Alliance Trust management squad. That, the trust claims, has helped it to attract talent who would otherwise never have considered joining a self-managed investment trust.

These funds are all too new to have meaningful performance records but the early indications are not that inspiring. All five Oeics are behind their benchmarks over one year, according to Trustnet, although the two with two-year track records – UK Equity Income and North American Income – were both ahead over the previous year.

Alliance is planning to launch one more fund, a global equity product, but Newlands questions whether these ventures are worthwhile. While the assets under management for third parties rose by 48 per cent in the six months to 31 July, at £123 million, it is still tiny by comparison with the £2 billion-plus value of the trust.

Newlands questions whether this is large enough to make a difference. ‘I would like to see them do it in a more concerted way, with a big marketing budget, full-page adverts and an IFA (independent financial adviser) campaign to raise hundreds of millions, if not billions.’

Laxey Partners is believed to remain on the shareholder register, although it has not made any public comments since the annual meeting in May. It could be that it is distracted by 3i, where it is pressing the private equity group to distribute its 35 per cent holding in 3i Infrastructure to shareholders. But it is likely to be keeping a weather eye on Alliance’s performance and could return to the fray if there has been no significant improvement by the next AGM.

Laxey is not the only active investor: Winterflood notes that ‘5 per cent of the register remains in the hands of value investors, including Elliott Associates. This being the case, the prospect of further corporate activity cannot be ruled out.’

A new chairman is being appointed to replace the retiring Knox. Garrett-Cox, whose £2.5 million or so of earnings since she arrived – before taking into account possible bonus payments – make her one of the highest paid in the fund management industry, knows she still has a lot to prove.

Can Alliance Trust Savings pay its way?

Alliance’s other subsidiary business is the investment platform Alliance Trust Savings (ATS). Garrett-Cox told investors in the interim statement that it was performing well, with a 30 per cent rise in accounts, helping it to an 18 per cent growth in revenues while costs remained flat. That meant losses fell from £2.6 million to £1.5 million.

But Newlands is sceptical about whether this business is worth keeping. ‘To me, it will never be significant to the investment returns of the trust itself.’

Others, however, are more enthusiastic. Charles Cade, an investment trust analyst at Numis Securities, thinks ATS could benefit from the changes that will follow the introduction of the Retail Distribution Review at the end of 2012. That will require independent financial advisers (IFAs) to consider all investment products when they are advising clients – including investment trusts, which are often shunned because they do not pay commission to IFAs.

ATS is one of the few platforms to offer a full range of investment trusts so could attract extra business – and business from IFAs has been growing and already accounts for 10 per cent of the total.

‘It looks a good business,’ says Cade. ‘If interest rates increased it would move to profit and, even without that, it is an interesting business.’ He adds that there would probably be pressure to sell ATS if it became larger and more profitable.