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It's round two for Laxey-Alliance but investors don't care

It's round two for Laxey-Alliance but investors don't care

Last week saw the renewal of hostilities between Laxey and Alliance Trust after the activist hedge fund insisted Katherine Garrett-Cox and her board consider outsourcing the fund's management.

The renewed call for change at Alliance came just days after the trust reported sector-beating returns, and roughly a year after Alliance shareholders turned down the offer of a strict share buyback, or discount control scheme, being introduced.

The latest requisition by Laxey, which is headed by Colin Kingsnorth, once again seems to have enough strength behind it to be put to a vote.

Or does it?

Like last year's assault on the global growth trust, Laxey's Kingsnorth is understood to have made clever use of the 100 rule, a clause in the Companies Act designed to allow a hundred like-minded minority investors to band together to create critical mass. Splitting his stake between 100 different cell companies allowed Laxey to requisition his demands singlehanded.

Even without the rule, support for Laxey's 2011 resolution was probably strong enough for its calls for change to be taken seriously by the vehicle's board.  Performance of the £2.5 billion closed-end global growth fund languished at around 60% over three years (versus 66.2% by FTSE World), its discount ran into the high teens and while its large shareholder base might have been enviable, it is fair to say it was behind the board due to inertia rather than any sense of enthusiasm.

Fast forward some 12 months or so and Alliance is in a different place altogether. Its final year total return was some 5% ahead of the global growth sector - the best set of numbers since Garrett-Cox came on board in 2007 - and while still wide at -15.4% the vehicle's discount volatility has been reduced (see Canaccord Genuity's chart below).

All this begs the question, why should shareholders care that Laxey has reignited its feud with Alliance?

Realistically, Alliance is being requisitioned by 0.07% of its voting share and this time around few other investors have so far stuck their head above the parapet to side with Laxey.

Alliance Trust seems to have picked up on this, and now it faces a second assault from the arb it looks set to be more vocal in its response to its critics.

A spokesman for the trust told Wealth Manager: 'The business has changed since last year's annual general meeting (AGM).  We produced  top-quartile performance, narrowed the discount, reduced volatility in the discount and announced a significant increase in our dividend.'

Laxey does make some fair points in its requisition served to Alliance, arguing that drilling down into net asset value (NAV) performance and removing the influence of buybacks, the vehicle would actually have underperformed by 1.5% versus the FTSE All World Index over the financial year to 31 December.

'Worryingly, we note that in the financial year to 31 December 2011, the stock selection over the discretionary investment portfolio was -0.3% when compared to the same index,' added Michael Haxby, the director at Laxey Partners who wrote to Alliance Trust investors.

Haxby also raised concerns about Alliance's 'ill-defined' and unquantifiable discount policy, as well as the cost of management fees, the latter which it claims could be cut by outsourcing management rather than continuing with Alliance's internal multi-manager approach.

While some of Laxey's criticisms have been picked up on by brokers covering the trust - Collins Stewart's Alan Brierley is one who said that sustained improvements were still needed after stock selection proved indifferent to wider outperformance - none of these issued after Alliance's results said that handing the vehicle's management to a third party could be the solution.

So while on one hand, followers of Alliance Trust and its shareholders have noted the strides forward by the vehicle over the last 12 months, investors and analysts are more concerned with the need for continued improvement (the same note by Brierley, for example, points out Alliance's numbers remain 'anemic' on a three-year view and that bafflingly its underperformance in Q3 and outperformance in Q4 is counterintiuitive given its historic low beta focus).

But on the other hand, it will not escape their attention Laxey's criticisms have come at a time when hedge funds are in dire need of performance (as are some externally multi-managed trusts) and that this time round, Laxey's calls for change don't focus entirely on shareholders' core concerns; investors want change but not necessarily an exit from the fund as well as real NAV enhancement.

Both would ultimately ease the pressures threatening to push Alliance's discount wider. 

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