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Alliance Trust changes to improve performance

Alliance Trust is making a number of changes in a bid to improve performance.
October 8, 2015

Alliance Trust (ATST) is cutting costs, introducing a benchmark and targeting a single-digit discount following pressure from an activist shareholder, Elliott Associates, and chief executive officer Katherine Garrett Cox is to step down from its board. These changes will be implemented by 1 March 2016.

Alliance Trust's board is becoming fully independent and will be comprised solely of non-executive directors. Ms Garrett-Cox will continue as chief executive officer and a director of subsidiary Alliance Trust Investments (ATI). Alliance Trust chief financial officer Alan Trotter is leaving Alliance Trust.

There have already been substantial changes to the trust's board this year with Anthony Brooke and Rory Macnamara, proposed by Elliott, joining in the summer, and the recent appointment of Chris Samuel and Karl Sternberg.

Separate boards will be established for ATI and Alliance Trust Savings (ATS), and the timescale for ATI to achieve profitability will be accelerated with a cost reduction programme of around £6m a year. ATI is expected to achieve monthly profitability by the end of 2016.

ATS, meanwhile, has appointed a new finance director Arlene Cairns.

The trust has also set up a management engagement committee. If ATST does not outperform its new benchmark, MSCI All Country World Index, by at least 1 per cent a year net of fees, a full review will be undertaken and external managers considered. One of Elliott's suggestions had been for the trust to consider outsourcing the investment management.

Alliance Trust mostly under performed MSCI All Country World Index between 2010 and 2014 but it has done better recently so its numbers have improved. The trust has persistently traded at a double-digit discount to net asset value (NAV), typically between 10 and 15 per cent over the past couple of years. Its board hopes these changes will move it in to single digits, and it will also use share buybacks.

Following the announcement of the review results on 1 October the trust's discount to NAV has moved from 11.4 to about 10.1 percent.

Under the terms of a new investment management agreement, the trust will be charged 0.35 per cent on average net assets excluding investments in its subsidiaries. It is targeting an ongoing charge of 0.45 per cent or less by the end of December 2016, down from 0.69 per cent at the end of 2014. This would make it one of the lowest cost Association of Investment Companies (AIC) Global sector trusts.

The trust is continuing its progressive dividend policy but only via ordinary, rather than ordinary and special dividends. Two thirds of administrative expenses will be allocated to the capital rather than the revenue account to offset the loss of income from disposing of non-core assets. It also has revenue reserves of more than last year's dividend.

Alliance Trust will increasingly focus on global equities and dispose of its fixed income (5.1 per cent of the portfolio), legacy mineral rights (1 per cent) and property assets (0.4 per cent) as soon as practicable. As its private equity investments mature over the next few years the proceeds will be reinvested into equities.

Earlier this year Elliott Advisors had tried to get three of its candidates onto the trust's board but a vote was averted at the trust's annual general meeting after Alliance Trust agreed to appoint two of these candidates and seek a third. Elliott was taking this action due to grievances including underperformance against sector peers and certain indices, continuing losses in subsidiaries ATS and ATI, and the discount to NAV. In return Elliott will not call a general meeting or seek to agitate against the trust publicly until after the 2016 AGM, however, it has added to its position in recent weeks and now holds about 14 per cent of the shares.

 1-year share price return (%) 3-year cumulative share price return (%)5-year cumulative share price return (%)10-year cumulative share price return (%)
Alliance Trust Ord9.837.062.193.5
AIC Global sector average2.130.646.096.7
MSCI World All Cap NR USD4.538.057.7na

Source: Morningstar as at 2 October 2015

 

Analyst views

Iain Scouller, head of the investment funds team at Stifel, said: "What matters most to shareholders is the NAV return and 99 per cent of that is likely to be derived from the investment portfolio. The chairman said that no change is anticipated in the sector or geographic positioning of the portfolio, following the introduction of a benchmark. It also appears that 94 per cent of the existing portfolio will be retained, at least initially. We think there needs to be continued improvement in relative performance, together with a substantial buyback, in order to move the share price in a big way relative to other international trusts."

Analysts at Winterflood said: "An investment trust offering exposure to a quality portfolio of growth and income stocks is attractive," commented. Furthermore, the subsidiary businesses do seem to be nearing a point at which they could make a meaningful contribution to shareholder returns. However, despite its wide discount, we believe that it is still early days for the investment team and consequently continue to prefer investment trusts that have similar characteristics but have delivered stronger performance returns such as Witan (WTAN), Bankers (BNKR) and Foreign & Colonial IT (FRCL)."