Activist proposes new directors for Alliance Trust

Elliott is concerned about the:

■ persistent underperformance of Alliance Trust against its sector peers and relevant benchmarks;

■ high and inflexible nature of the cost of the trust's internal investment management function; and

■ continuing losses in two operating subsidiaries, Alliance Trust Savings and Alliance Trust Investments.

Alliance Trust's discount to net asset value (NAV) is more than 13 per cent, which Elliott says it among the highest discounts to intrinsic value among its relevant peers.

Recently appointed head of equities Peter Michaelis, is implementing a different investment strategy for Alliance Trust.

Read our interview with Mr Michaelis

However, Elliott says shareholders have already been asked to wait and see several times, including after the appointment of the last head of equities Iliario Di Bon in 2012.

Read our interview with Mr Di Bon

Elliott added that the trust has underperformed the MSCI AC World Index to which investors could get exposure via a passive fund for just a few basis points.

Morningstar data shows that Alliance Trust's share price has underperformed the index over one year, but beat it over three and five. Alliance Trust argues that it has made a total shareholder return of 54 per cent since Elliott became a shareholder, against 50 per cent for MSCI AC World Index and the AIC Global sector average of 44 per cent.

Price return%

Source: Morningstar as at 16 March 2015

Alliance Trust reports an ongoing charge of 0.6 per cent, but Elliott says if you include the losses of the subsidiaries then the total costs borne by shareholders are closer to 1 per cent.

Elliott also says that all appointments have been made by the board without shareholder consultation and prior notice of a vacancy, including the appointment of Mr Michaelis last September. Elliott takes issue with this being done via internal promotion, without advertisement, inviting external proposals and canvassing shareholder views.

"The board will be aware that large domestic and international external asset managers would be able to offer Alliance Trust several alternative investment strategies, with attractive return potential across the economic cycle and at competitive cost," says Elliott. "Whereas other investment trusts have successfully negotiated reductions in asset management fees in recent years, the administrative costs of Alliance Trust have doubled under the present executive management."

Alliance Trust doesn't recognise the reference to costs doubling, saying that costs were £16.8m in 2009 and £20.8m in 2014.

Elliot reports that Alliance Trust has not given any meaningful responses to several letters and has refused to answer pointed questions in meetings, giving responses such as "these are matters for the board to decide." For example, Alliance Trust is alleged not to have said if it considered external investment houses before appointing a new head of equities last autumn, or whether it had expressions of interest from other asset managers.

However, Alliance Trust said that after its annual results publication earlier this month its chairman and chief executive met Elliott twice in one week and addressed its concerns. It added that Alliance Trust Investments is due to be profitable from 2016, but if it doesn't keep the management in house then this growth may not come through.

"Elliott has raised a number of valid points in its proposals and believes that it will find sympathy from some of the existing shareholder base," said Ewan Lovett-Turner, director, investment companies research at Numis. "In particular, the potential to consider external management may be welcomed given that Alliance Trust has been a consistent underperformer and has adopted numerous changes in approach in recent years. However, with a stake of 12 per cent Elliott is a long way from winning the vote."

Elliott has written to the trust's other shareholders asking them to support this action at the annual general meeting on 29 April.

Elliott proposes adding to the board Anthony Brooke, Peter Chambers (the former chief executive officer of Legal & General Investment Management) and Rory Macnamara, who all have extensive experience in financial services.

Elliott says it used a search firm to find them so they are wholly independent. But Alliance Trust argues that as Elliott paid for the headhunters it is hard to believe these proposed directors are totally independent.

Alliance Trust has been met with a number of challenges over the past few years led by another activist investor, Laxey Partners, and these were supported by Elliott which has been a shareholder since 2010. These challenges were defeated but led to Alliance Trust implementing changes such as share buybacks.

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Source: Morningstar, *Alliance Trust

Top 10 holdings as at 31 January 2015 (%)

Geographic breakdown (%)