Alliance Trust is the UK's biggest investment trust so many other trust managers will be watching a vote next week on the key issues of discount control, costs and voting rights.
The proposals have been tabled by Laxey Partners, which holds less than 2 per cent of Alliance Trust's shares. But if Laxey succeeds in persuading other investors to support its resolutions, they could be passed and would affect all holders of the trust's shares.
Laxey proposes that:
■ Alliance Trust introduce a discount control mechanism under which it would buy back its shares whenever the discount to NAV exceeds 10 per cent during normal market conditions; and
■ Alliance Trust change the voting rights in the savings schemes it runs.
The trust's discount to NAV has averaged at 16 per cent over the past five years, according to Laxey, and at times has been much wider, for example 28 per cent in 2008. This is wider than the average for its investment trust sector, global growth (see table).
Alliance Trust discount versus peers
| Investment Trust | Discount/Premium to NAV (%) | 5yr NAV perf (%) | TER (%) | Market Cap (£) |
|---|---|---|---|---|
| Alliance Trust | -14.86 | 27.52 | 0.63 | 2.53bn |
| RIT Capital Partners | 3.17 | 41.64 | 1.88 | 2.02bn |
| Scottish Mortgage | -8.89 | 66.82 | 0.56 | 1.96bn |
| Foreign & Colonial | -10.99 | 37.62 | 0.51 | 1.86bn |
| Witan | -11.01 | 41.58 | 0.9 | 1.02bn |
| Caledonia | -17.35 | 20.22 | 1.17 | 1.04bn |
| Monks | -9.52 | 43.94 | 0.64 | 959.4m |
| Scottish Investment Trust | -10.26 | 35.54 | 0.71 | 585.8m |
| British Empire | -6.93 | 44.1 | 0.74 | 842m |
| Bankers | -11.92 | 35.73 | 0.42 | 469.1m |
Part of the reason for the wide discount is that for much of its history, and unlike many other investment trusts, Alliance Trust did not buy back its shares on the open market. This has begun to change; in late 2009 and 2010 it bought back shares from two institutional shareholders, Norges Bank and DC Thomson. By April this year, Alliance Trust had bought back around 3.6m shares, worth £12.4m - although that's a fraction of its £2.5bn market value. During this time its discount to NAV has tightened to around 14 per cent, although this is still double the average discount to NAV of 7 per cent for global growth investment trusts.
Laxey argues that the introduction of a discount control mechanism has been highly successful for three comparable investment trusts, Scottish Investment Trust, F&C Investment Trust and Witan, and would improve Alliance Trust's performance. Alliance's NAV returns have lagged its sector average over one, three and five years.
Laxey and other investors are also concerned that if the resolution for a discount control mechanism is defeated, Alliance Trust will then cease buying back shares and allow the discount to widen again. Laxey says that if Alliance Trust does not set out a clear policy on the discount, some shareholders may push for the investment trust to be run by another fund management firm.
"This is not something we put forward, but something on which we had surprisingly popular feedback on from shareholders," says Colin Kingsnorth, founder of Laxey Partners. However, Laxey Partners did not provide details of which shareholders suggested this, or what percentage of the trust's votes they control.
Alliance Trust is still urging investors to vote against both proposals. It says a rigid discount control mechanism would impair investment flexibility and performance, as it would have to manage its portfolio on a shorter-term basis. It prefers to continue with what it describes as its flexible buyback policy, on the grounds that it benefits long-term shareholders. It also says that a discount control mechanism could increase its total expense ratio, raise its cost of debt and threaten its ability to grow the dividend.
Katherine Garrett-Cox, Alliance chief executive
Voting
Laxey Partners' second proposal is to change the voting system for investors who hold shares via Alliance Trust's savings schemes. Nearly 22 per cent of trust's capital is owned in this way. If savers do not vote, their shares are automatically voted in the same proportion to the votes that are cast by savings scheme members. Laxey says this voting system, known as 'scaling up,' effectively gives control to the trust's managers, because they are among the few saving scheme shareholders who actually use their votes.
Alliance Trust announced in April that it would not use the 'scaling up' voting system for its savings schemes at any future AGMs, including the one on 20 May. But it is still urging investors to vote against Laxey Partner's resolution, on the grounds that it "is too widely framed and as drafted could apply to all investments held by Alliance Trust Savings investors, not just shares in Alliance Trust."
Laxey is unmoved. "The one share, one vote principal should exist in all cases," the company says, by which it means at extraordinary meetings (EGMs) as well as AGMs.
Total expense ratio
Laxey Partners' other concerns include Alliance Trust's total expense ratio (TER), which it says does not reflect the full costs to shareholders. The TER takes into account the investment trust's expenses, but does not account for Alliance Trust's two loss-making subsidiary businesses, Alliance Trust Asset Management and Alliance Trust Savings. The reported TER is around 0.63 per cent, but says Laxey it would be much higher if you added in the subsidiaries' expenses, and no longer favourable compared to its peers. Laxey adds that over the last six years while the investment trust's costs have grown 161 per cent, the whole company's costs have grown 315 per cent.
Alliance Trust counters that the TER is calculated in the standard way according to Association of Investment Companies (AIC) guidelines, which allow the trust to be compared on a like-for-like basis with its peers. It aims to continue to developing its subsidiary businesses, which it says are long-term ventures.
