IT Insider: three months on from AGM and Alliance Trust future still not secure

It is now a couple of months since the Alliance Trust AGM and, considering how vehemently the board opposed buying back shares to control the discount, they seem to have had a remarkable change of heart.

While it is true to say that Alliance Trust had bought back shares before receiving Laxey’s requisition in December last year, buybacks were infrequent and tended to be large deals designed to accommodate the sale of a block of shares by one shareholder.

Nothing happened in January, in February there were three share repurchases and in March a couple (one of which alleviated the selling pressure caused by their exit from the FTSE100).

In April the board said that targeting a discount range would 'impair investment flexibility', mean they 'would have to manage its portfolio on a more short-term basis' and 'increase your company's total expense ratio'. They also said the 'company's cost of debt would rise over time as its asset base reduced' and 'the ability of the company over the long-term to pay a growing dividend' would be endangered.

Powerful stuff and you might have thought, since they defeated the resolution to introduce a discount control mechanism, it would have been business as usual post the AGM. To date however they have bought back 36 million shares worth approximately £135 million with deals happening almost every day.

It is a shame then, despite narrowing a little, the discount remains one of the largest in the peer group. Only Utilico , which is a bit of a strange animal and is probably mispriced as a result, Caledonia , which has a lot of unlisted holdings and hasn’t performed too well recently and Majedie , where illiquidity and long-term underperformance combine to put off most investors, trade on wider discounts.

I think Alliance missed an opportunity to follow Witan’s example and target a specific discount. The experience at Witan was that the discount narrowed quickly and has traded in a fairly narrow range since.

Yes, they have bought back a lot of shares but had they not the chances are these would have ended up in the hands of arbitrageurs and the fund’s future would be doubt. It seems a bit daft for Alliance to be repurchasing so many shares without much impacting the discount.

The share repurchases do have the benefit of boosting returns – I think around 1% has been added to the fund’s performance so far this year. Over the past year Alliance has lagged the peer group by about 2% so the implication is this would have been about 3% without the benefit of the buybacks.

The bulk of the underperformance must originate from stock selection since, apart from a slight overweight to North America, their asset allocation is close to the average for the peer group. They still have exposure to fixed interest, direct property and private equity which is more or less funded by their gearing.