Private shareholder representative organisation ShareSoc has come out in favour of proposals by activist investor Elliott Advisors to add three new directors to the board of Alliance Trust (ATST). It follows Alliance Trust's rejection of Elliott's proposals last week in a formal response, and a recommendation that shareholders vote against Elliott at the annual general meeting on 29 April.
Alliance Trust's formal response added that Elliott has a short-term agenda at odds with its other shareholders, aimed at facilitating an exit from the trust. It added that Elliott has repeatedly asked for a tender offer for 40 per cent of its outstanding shares at a very narrow discount, which would require a significant liquidation of its assets.
Elliott argues that it is has been a long-term shareholder having held Alliance Trust shares for nearly five years, and that adding independent directors is not a short-term solution as sorting out the trust's problems is at least a medium-term issue. Elliott says it originally invested in Alliance Trust because its strategy is to invest in closed-end funds; in 2010 Alliance Trust was on a sizeable discount and is suitably large; and it is historically a strong brand so has the potential to turn around with the right board and strategy.
ShareSoc says that when long-term underperformance and wide discounts to net asset value (NAV) occur, "shareholders should demand action when such conditions persist, and that action might include the appointment of new directors so that a fresh view of the strategy of the company can be obtained... Although there was some improvement (in the share price total return) in the last year, this seems to have partly arisen from special circumstances related to their private equity and mineral rights investments."
Elliott also raises the issue of performance. It says the shareholder return in 2014 of 9 per cent is only higher than the NAV total return of 8.1 per cent because the discount narrowed over the year. It also says that the NAV total return includes multiple adjustments for:
1) a write up in the value of private equity investments;
2) the increase in value of legacy mineral rights investments; and
3) a write up in the value of loss making subsidiaries.
Elliot alleges that 17 per cent of the return comes from these adjustments.
Alliance Trust says the discount narrowing is a positive and what Elliott has been asking for, and points out that the private equity is managed by a third party so the valuation is what it gives Alliance Trust - not what the directors set. Six full exits have been made and at an average growth multiple of 3x the original investments. It also says the valuation of the private equity is in accordance with the private equity industry's approach based on international private equity valuation guidelines.
Alliance Trust also values the mineral rights at fair value in line with industry standard methodology, as set out on page 22 of its annual report. As the oil price was doing well in the first half of 2014 these have done well, because the income is contracted well in advance. However, Alliance Trust says in its annual report that the drop in the oil price in the second half of 2014 will potentially depress the mineral rights income and so their valuation in 2015.
Its ordinary dividend will still be 3 per cent higher in 2015 than 2014, but special dividends will depend on the level of income received.
"We are open and transparent in the way that we report our numbers which have been audited by one of the big four accountancy firms (Deloitte)," says Alliance Trust. This includes the valuations of its subsidiaries Alliance Trust Investments and Alliance Trust Savings.
ShareSoc, meanwhile, is also keen that investment trusts on a wide discount to NAV have a specific policy on controlling them, for example via share buy-backs or tender offers.
"If Elliott Advisors have suggested a tender offer then that is perfectly understandable and tender offers are one of our most preferred solutions because investors then have the option of accepting it or not," says ShareSoc. "Shareholders in Alliance Trust should consider the proposed requisition very carefully and vote in favour of the proposed directors unless the trust comes up with stronger arguments than they have to date. Their rejection of the proposals out of hand seems unwise and is unfortunately a typical response seen from boards who are reluctant to tackle the key issues when faced by criticism from outside."
However, investment trust analysts point out that while such actions can cause a trust's discount to NAV to tighten a return of capital also shrink the trust's size and make the expense ratio rise.
