View the article online at http://citywire.co.uk/money/article/a488331
Alliance Trust told to get 'sexy' or buy back shares
Alliance Trust must change its investment focus or buy back shares to narrow its discount to net asset value according to research commissioned by Laxey Partners.
Activist investors are increasing the pressure on Alliance Trust , calling on the management of the investment trust to change its investment focus or buy back shares.
Laxey, an activist hedge fund which owns 1.7% of Alliance Trust, is spearheading a campaign to force the investment trust to narrow its discount (when a trust’s shares are worth less than the assets the trust owns). One way this could be done is by buying back shares, but Alliance Trust has argued that improving the performance of the trust would also narrow the discount.
Earlier this month Alliance Trust’s management published a response to investors which argued against Laxey’s demand for an automatic discount control mechanism which would force the trust to start buying back shares if the discount fell beyond 10%.
Research commissioned by Laxey, published today, undermines Alliance’s claim that better performance would reduce the discount. The conclusions of the research appear to fly in the face of conventional wisdom – that demand for investment trusts will improve with performance and, in turn, this would reduce the discount.
‘We have found no real evidence that performance alone will increase demand, and thus narrow discounts’ said analyst Lewis Aaron, of Fund Consultants LLC, who wrote the report.
Aaron, said: ‘Whilst it is intuitively appealing to believe that better performance leads to higher demand, we have examined a substantial amount of data and found little correlation between the two, where relative discount was used as the proxy for demand.
‘We did however find that funds investing in “sexy” areas (i.e. China, where growth is expected to be significantly higher than elsewhere) do attract higher demand, resulting in narrower discounts’, he added.
Aaron said that changing the trust’s investment focus towards ‘sexy’ areas was a possible solution: ‘Certain investment areas, i.e. high income or specific geographic focus, trade on narrower discounts or even, in some cases, premiums. Therefore, a change of investment focus, say to a global high income fund, could be a possible solution for Alliance’s discount problem.’
But the research claimed that the main reason for the wider discount was simply that there were too many shares and that Alliance needed to buy some of them back: ‘It is our opinion that Alliance’s supply/demand imbalance has existed for some time and was exacerbated by the merger in 2006, when 167.9m new shares were issued. Thus, it is this problem that appears to be the principle persistent cause of the fund’s wide discount.’
In a telephone conference Colin Kingsnorth, co-founder of Laxey, said he believed his campaign had won considerable support and agreed that the appearance of the US activist investor Elliot Advisors, which recently bought 3% of Alliance, was a ‘game changer’. He added ‘They [Elliott Advisors] have got very deep pockets, they could buy the whole lot if they wanted to.’
Kingsnorth also said that if there was a significant vote against the management at Alliance’s AGM on 20 May then other investment groups could challenge the existing management.
Sharesoc, an organisation which supports individual investors, said it supported Laxey Partners' proposals. Sharesoc's chairman, Roger Lawson, said: ‘We believe that it is not in shareholders' interests to have a consistently wide discount to Net Asset Value (NAV) and that is surely true whether shareholders are short or long term holders, and whether they are institutional investors or private investors.’
He said: ‘Failing any alternative proposals from the board of Alliance we consider the resolution proposed by Laxey to be a reasonable approach to take.’
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