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Laxey's Alliance Trust battle is noble but doomed

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Laxey's Alliance Trust battle is noble but doomed

Media coverage of the investment trust sector has been dominated over the past few months by Laxey Partners’ campaign against Alliance Trust.

This started last November, when Laxey sent an open letter to the board of Alliance Trust that set out proposals to adopt a discount target of 10% and to revise the voting rights of the savings scheme following accusations the current system was open to abuse.

In late December, Laxey Partners, headed by Colin Kingsnorth, above, used the Companies Act rule, which allows a proposal put by 100 shareholders to be put on the agenda for the AGM, to insert two resolutions.

In April, Alliance Trust publicly responded for the first time to Laxey’s campaign, repudiating many of its charges and setting out counter-arguments. The fund also published a circular ahead of its 20 May AGM, recommending shareholders vote against the two requisitioned resolutions.

The board denied that the savings scheme allowed ‘management enfranchisement’ but decided to remove the mechanism as it applies to Alliance Trust while continuing to oppose Laxey’s resolution.

Regarding a discount control policy, the board was steadfast in its belief that investment performance was the key driver to the company’s share price and that implementing a rigid discount control would benefit short-term investors only.

The past five months have been difficult for Alliance Trust and the results last month were a chance to set the record straight. Given the level of the directors’ holdings through the savings scheme, Laxey appears to have been wide of the mark in its contention that the fund was being controlled through the scaling-up mechanism. However, the decision to remove the shareholder enfranchisement scheme removed any doubts going forward.

The fund’s buyback policy has evolved this year with more regular activity following consultations with shareholders. Alliance Trust CEO Katherine Garrett-Cox has claimed that buybacks are now part of the company’s DNA. This will be welcomed by many of the fund’s long-term shareholders.

The chances of Laxey’s discount target resolution being successful always depended on the support of long-term shareholders. Laxey and other value-orientated shareholders do not appear to own sufficient shares to force through the resolution on their own.

I suspect that long-term shareholders will take some comfort from the commitment to buy back shares on an opportunistic basis and support the board. How Laxey will respond remains to be seen but further corporate activity would not be a surprise.

Although Alliance Trust should successfully fight off Laxey at its AGM, the fund’s appeal to retail shareholders is still questionable. The performance record under Garrett-Cox remains unexceptional and the fund’s ability to outperform its peers on a sustained basis is still open to question.

In addition, Alliance Trust’s subsidiary businesses still have some way to go. The savings business remains loss-making and although the asset management business has attracted over £100 million of external money, it is still a long-term project. In my view, there are stronger global growth funds available in the investment trust sector. 

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