The battle for the soul of Alliance Trust hots up

Nothing strengthens authority so much as silence," wrote Charles de Gaulle in his 1932 book Le Fil de l'epee (The Edge of the Sword).

After distinguishing himself in the first world war, Mr de Gaulle wrote extensively on how France should prepare for and conduct warfare should Germany eventually rearm, but his warnings went unheeded.

When France fell to the Axis powers in 1940, silence took on new meaning for the French Resistance who later came to draw inspiration from le General's leadership.

The fund industry took a leaf out of Mr de Gaulle's book as the world succumbed to financial crisis seven years ago, maintaining an authoritative silence as the banking sector was hauled over the coals.

But a recession-weary public has turned on the well-paid managers of active funds, where a fund manager aims to outperform the wider stock market. In the face of the rise of ultra-cheap passive fund investing that cuts out active managers entirely, the industry is facing an existential threat.

Once the fund industry's silence engendered authority, but now it smacks of siege mentality amid rising calls for change from vocal critics, politicians and regulators.

The focus is on funds that consistently underperform, making underwhelming bets against the market while taking active management fees and paying out healthy fund manager bonuses.

Alliance Trust, the 127-year old £2.8bn London-listed investment trust has, according to its own March 31 fact sheet, lagged behind rival funds in net asset value terms over one, three and five years.

The trust's shares have consistently traded at a wide discount to the value of its investment portfolio for at least a decade, reflecting poor demand for the shares. Shares of close rival Scottish Mortgage have returned more than double Alliance's 68 per cent return in the past five years, according to FE Analytics, the data provider.

Last week the trust's corporate broker, JPMorgan Cazenove, admitted performance was "lacklustre" and suggested it could conduct an internal review, in a blow for Katherine Garrett-Cox (above), the trust's chief executive and lead investment manager.

Trading volumes in the trust's shares are typically low, but since March 2011 the UK arm of a US hedge fund, Elliott Advisors, has been building a position in a move that has eased the discount issue slightly. It now holds a 12 per cent stake.

After closed talks proved fruitless, that investor has now gone activist, requisitioning the trust's board to bring resolutions at its forthcoming annual meeting to appoint three new independent non-executive directors.

Alliance Trust, however, has refused to acknowledge its performance issues and pulled out all the stops, launching a smear campaign against Elliott. It features a prominent link on its website that warns against the resolutions in bold letters.

The trust's contention is that Spencer Stuart, the recruitment firm that found the three nominees, was instructed by Elliott and so therefore the nominees are not independent.

But the fact is that under UK regulation they would be required to be independent of influence from individual shareholders. There is no evidence that they would breach these rules.

To my mind it does not matter who nominated these three. What matters is who they are and whether Alliance Trust could benefit.

The nominees are Peter Chambers, a former chief executive officer of Legal & General Investment Management; Anthony Brooke, who spent nearly 30 years working across the City; and Rory Macnamara, an accountant who is already chairman of another trust.

Alliance claims the nominees are the "thin end of the wedge", saying Elliot wants to disrupt the trust to its own ends.

But how can it do that by appointing three fresh pairs of eyes, who would be required to be independent, to a board that would have 10 people on it? They would not even have a majority vote to enact change.

So why does Alliance Trust appear to be scaremongering?

Perhaps it worries it might one day have to acquiesce to calls to outsource management to better investment managers elsewhere. This would not bode well for Ms Garrett-Cox - she has earned more than £6m in the past five years.

It did not help the trust's case that last weekend a former non-executive director at Alliance - one of many who have come and gone in recent years - published an open letter criticising it and backing the resolutions.

Underperforming managers refusing to facilitate dissent, or accept their own shortcomings, are contrary to public sentiment.

That is why my magazine, Investment Adviser, is encouraging investors to vote "yes" to resolutions 14, 15 and 16 at the Alliance Trust annual meeting on April 29.

John Kenchington is editor of Investment Adviser

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