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Is Laxey's attack on Alliance justified? Probably

by Simon Elliott on Apr 24, 2012 at 00:01

Is Laxey's attack on Alliance justified? Probably

Last month, Laxey Partners put forward proposals for the board of Alliance Trust to: determine how both investment performance and the discount to net asset value can be improved; examine the possibility of externalising the fund’s investment management; and bring forward proposals that would enable shareholders, who wish to sell, to exit at a share price that ‘more closely reflects net asset value’. These will be voted on at Alliance Trust’s AGM on 27 April.

Tax legislation has changed, from April 2012, which allows realised capital gains to be used to pay dividends. Laxey is proposing that Alliance Trust use these changes to pay a higher dividend, regardless of the portfolio yield, as an alternative to share buybacks in order to tighten its discount.

Last year, Laxey also put proposals to Alliance Trust shareholders at its AGM, including a 10% discount control mechanism. These were defeated but not before the fund had introduced an active buyback programme. Since the start of 2011, Alliance Trust has bought back 81 million shares worth £291 million and equivalent to 12% of the share capital. Katherine Garrett-Cox, CEO of Alliance Trust, says buybacks are now part of the fund’s DNA.

Alliance hits back

Alliance Trust has hit back strongly, refuting Laxey’s criticisms and suggesting the value investor’s proposals will only benefit short-term investors. It also claimed that ‘persistent’ requisitioning was wasting money and estimated that the costs of the defence for both last year’s and this year’s AGM would be £2.5 million.

Are Laxey’s criticisms justified? Probably. Alliance Trust’s performance remains dull at best and there is evidence of a substantial style drift. In addition, despite the buyback programme, the discount remains substantially wider than its peers.

Last year’s intervention led to Alliance Trust consulting widely with its shareholders. This produced a clear message – sort out the discount – which in turn led to the active buyback programme. Although it is hard  to see Laxey’s proposals achieving success at the AGM, shareholders will doubtless use the opportunity to express their views. We suspect many would welcome the involvement of an external investment manager.

[Aberdeen founder] Martin Gilbert’s carefully worded comments in the Daily Telegraph recently have led to speculation that Aberdeen AM could be involved. No doubt other fund management groups would look to throw their hat into the ring if an opportunity presented itself.

Where this would leave the rest of Alliance Trust’s business remains to be seen. However, the role of the non-executive members of its board is crucial in this process and this will be a substantial first test for the chair, Karin Forseke. Hopefully, she will keep an open mind in her forthcoming meetings with the owners of the company.  

Simon Elliott is head of investment trust research at Winterflood Securities.

5 comments so far. Why not have your say?

Keith Cobby

Apr 24, 2012 at 15:39

I hope and expect Laxey will lose. They are just short term raiders wanting to make a quick buck before moving on.

I cannot understand why commentators are obsessed with investment trust discounts ( or premiums), because, for very long term investors, they are utterly irrelevant. My advice to these people is to stick with OEICs and unit trusts.

Alliance Trust has been around for a very long time, longer than all other collective investments, bar a few other investment trusts - long may it continue.

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Anonymous 1 needed this 'off the record'

Apr 24, 2012 at 15:51

Keith, it's investors like you that the likes of Laxey profit from. Common sense should tell you that buying stock on a premium and selling it at a discount is unlikely to generate great returns. (e.g Fidelity China)

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Keith Cobby

Apr 24, 2012 at 16:05

I am afraid it is far too early to tell whether or not Fidelity China is a good or bad investment.

I doubt that Alliance Trust has ever been on a premium.

All Laxey want to do is close the discount and take their profit. For very long term investors the discount is an irrelevance.

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Anonymous 1 needed this 'off the record'

Apr 24, 2012 at 16:23

Consider this simple example.

Buy - Share price 100, NAV 100 (a 0% discount)

Stay invested for 10yrs i.e. a ‘long term investor’ saving for a wedding, school fees etc.

Sell – Share price 170, NAV 200 (a 15% discount, like Alliance Trust’s).

Investors return over 10 years is +70% vs. 100% for the NAV. Annualised Return is 5.4%p.a against 7.2%p.a if the discount hadn’t widened.

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Keith Cobby

Apr 24, 2012 at 16:40

My final post!

An interesting hypothetical example, but, as I posted earlier, anyone getting sleepless nights worrying about discounts should stick to OEICs and unit trusts.

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