Alliance Trust: numbers up

Stand-off in Dundee. The local hero: Alliance Trust, an investment trust (or closed end fund) managing about £3bn. The outsider: Elliott Advisors, the US activist hedge fund famous for attacking the Argentine government.

Elliott has owned Alliance Trust shares since 2011. It now has a 10 per cent stake. Its main beef is that the shares have traded at an average discount of 13 per cent to their net asset value over the past three years, while performance has been dull at best. Discounts are common at investment trusts, but the average trust investing in global equities (as Alliance does) has a discount of just 6 per cent.

Elliott also wants the management fees to fall. Alliance Trust charges fixed active management fees -nowworth about 65 basis points - for a fund that has closely tracked the MSCI All Country World Index (93 per cent correlation over three years). Alliance argues that its fixed fee structure means that the proportion will fall as the trust's assets swell over time. Yet an exchange-traded fund of the same MSCI index would cost half of what Alliance charges.

If Alliance could prove that its investment skill is worth the extra charges, then perhaps fewer activists such as Elliott or Laxey Partners (in 2011) would take an interest in it. But its performance has trailed the world benchmark since the current management, led by Katherine Garrett-Cox, since 2010. That has not prevented her pay from doubling over that period to £1.4m.

So Elliott makes some good points. But it is overplaying its hand. It has proposed three candidates for an expanded 10-seat board of directors, although it insists that these nominees are independent. Perhaps. But if successful, Elliott could have influence well above the size of its stake in the company. Unless it scales back its ambition (or increases its stake), other shareholders would be right to reject its proposed directors.

But Alliance Trust has the bigger questions to answer. Unless it can prove it has a strong and unique selling point to investors, the company will struggle to extend its 142-year history.

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