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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.

Alliance Trust told to get 'sexy' or buy back shares

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.’

10 comments so far. Why not have your say?


Apr 21, 2011 at 12:52

‘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.

- It's about time somebody pointed this out. There is too much nonsense written and spoken about the causes of and solutions to IT discounts.

‘It is our opinion that Alliance’s supply/demand imbalance has existed for some time ... it is this problem that appears to be the principle persistent cause of the fund’s wide discount.’

- Oh dear, even Fund Consultants LLC appear to have fallen into the trap of assuming there is a simple answer to the cause of IT discounts. It's a pity the report couldn't have been less biased in favour of Laxey's claims.

There is no compelling academic research to explain why ITs trade at a discount. Therefore "controlling" the discount is really just smoke and mirrors.

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Matthew Mackusick

Apr 21, 2011 at 13:19

The discount protects the interests of the directors/managers at the expense of the share holders

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William Bishop

Apr 21, 2011 at 13:35

It may be naive to think that investment trust discounts necessarily relate closely to investment performance, but it seems even more naive to ascribe the Alliance discount to the trust having "too many shares", an even more simplistic explanation.

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Apr 21, 2011 at 15:58

Matthew: How so?

If the discount remains at 15% for ever and a day, why does it matter?

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Apr 21, 2011 at 18:32

This so called activist short termism shows all that is wrong with most of the investment industry. It is very simple - if the shares are undervalued then buy them and keep them. It is the holders who are steadily selling the shares at a discount that will have lost out in the long term. If the shares are not good value even at a discount then don't buy them.

All this fuss and effort just for a 6% return less stamp duty, bid/offer spread and fees over a period of more than a year is just daft.

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Franco Bristolian

Apr 21, 2011 at 19:13

Why should one place any reliance on the view of the consultant when he does not understand the difference between principle and principal?

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Ragnar Danneskjold

Apr 21, 2011 at 19:51

To ask why a discount exists is to pursue a red herring, it's there, and like blood in the water it will attract bolder fish.

Alliance Trust (AT) is at liberty to buy, I believe, up to 14.99% of the outstanding share issue in any one year and thereby drive down the discount.

Why does it not do this?

Ths discount does not benefit existing shareholders who suffer reduced collateral and a lower price should they sell.

The discount of course benefits buyers of AT, who obtain a greater yield than they would if they purchased directly the same shares held by AT, but only to the extent that the discount does not continue to widen.

The discount also attracts buyers such as Laxley et al, who expect the discount to narrow for various reasons.

But for AT to address the problem and buy its own shares would lead, in the absence of gearing-up, to a reduction in the funds under management and thereby a reduction in management fees with a consequential shrinking of the size of management, the scope of its ambition, and perhaps even, brace yourselves, its emoluments. It's not difficult to understand their reluctance, and if they did gear-up for this purpose, well............

Like some other trusts Personal Assets Trust (PNL) operate an effective discount control mechanism, albeit one that seems to me to benefit management rather than shareholders, and when they approached AT on this subject, I believe AT declined to act. Perhaps because they feared that a reduction in size would cause AT to fall out of the FTSE100 which nevertheless occured.

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colin mckellar

Apr 21, 2011 at 22:49

I am an Alliance Trust shareholder & an Alliance Trust Savings(ATS) customer.

Alliance Trust has underformed owing to a significant number of dud investments and over diveresification (direct property purchased at the market peak, private equity, a specialist pension company intended as a bolt-on to ATS). They have also invested very large sums in Alliance Trust Asset Management (ATAM) & ATS. I have no idea if ATAM will be a success but I believe ATS to be a brilliant model as to how the entire nation should organise its savings. It is extremely efficient and low-cost - for fund purchases they refund all the initial charge and all the trail commission. When trail commissions are banned (end 2012?) I expect ATS to slaughter the competion and on its own to be an FT100 candidate. If a DCM is intoduced the risk is that there will be a fire sale of the assets of the recently closed private equity division not to mention ATAM & above all ATS.

I have downloaded reports of two Laxley managed close-end investment trusts Value Catalyst & Terra Catalyst - so far as I can tell both trade at significant discounts and neither has a DCM.

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Dennis .

Apr 22, 2011 at 00:41

there was an interesting discussion on the Radio 4 Today programe about a week ago where an American economist was arguing that share buybacks destroy shareholder value and serve only to attempt (usually unsuccessfully) to prop up share prices to help with management bonuses. His arguement was along the lines that destroying shares was effectively destroying growth potential by burning the company's cash pile.

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Apr 25, 2011 at 11:27

Read again AT's 2011 Annual Performance Review document before voting.

The points that stand out for me include poor investment performance in many sectors over the last 12 months:

UK - FLAT (meaning within 1% of benchmark)

Europe - FLAT




Emerging Markets - UNDER PERFORMED

Incidently :

1) Trustnet rates Alliance trust 26th out of 34 Global Investment trusts (1year NAV performance).

2) Investment Director received a Bonus of £420,000 (Around 100% of Salary).

My vote is with Lacey - someone just has to make a stand over the many years of increasing fees with indifferent performance. No wonder the discount is high.

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