Activist Elliot squares up to Alliance Trust

Buenos Aires, Congo, and now, Dundee.

For employees of Elliott, the US hedge fund famed for aggressive and ruthless shareholder activism across the world, fighting the board of a staid Scottish investment trust is unlikely to be their most glamorous tour of duty.

Yet Elliott's latest campaign may still turn out to be one of its toughest.

On Friday the dispute intensified as Alliance Trust, one of Scotland's oldest with £2.9bn under management, escalated its feud with New York-based Elliott when it fired a missive to shareholders appealing for support. At the same time, a former Alliance board member sent his second letter backing the activist fund.

The battle first kicked off almost exactly a month ago when Elliott, which has built up its stake in the trust to 12 per cent to become the biggest shareholder, laid down proposals to place three new directors on the group's board to address what it says is the trust's poor performance, high costs and excessive remuneration.

Now, with just over a week left before a crucial vote on Elliott's proposals is held at Alliance's annual meeting in Dundee on April 29, both sides have stepped up their campaigns to win over the hearts and minds of the trust's largely small shareholders.

One top 20 investor institutional investor in the trust said on Friday: "I am hearing the contest is so evenly balanced you can almost feel the sharpness of the knife edge."

In essence, it is an intriguing clash of cultures, pitting Mark Levine, Elliott's hard-nosed portfolio manager, who is heading the campaign and hails from New Jersey, against Katherine Garrett-Cox, Alliance's feisty chief executive.

It is a far cry from the typical targets of Elliott, one of the oldest hedge funds in the US with a reputation for shareholder activism. It once organised the seizure of an Argentine tall ship in a spectacular stand-off over debt defaults and also pursued the governments of Peru and the Democratic Republic of Congo over defaulted debt.

So why is Elliott using its extensive muscle to put the squeeze on Alliance, which is still based in the relative backwaters of Dundee where it was launched in 1888? Some investors say it is simply because Elliott sees an opportunity to raise the game and share price of a group with a performance that was described last month as "lacklustre" by JPMorgan Cazenove, its own corporate broker.

Alliance's total shareholder returns over five years fall short of many of its main rivals, such as Foreign & Colonial Investment Trust, Witan Investment Trust and Scottish Mortgage Investment Trust.

Elliott says that it has engaged regularly with the board on various issues but that its chief concerns - underperformance of the investment portfolio against peers, high and inflexible costs and the continuing losses in the two operating subsidiaries - have not been addressed.

It blames all three for the wide discount, a market gauge of performance, at which the trust trades. Of the 10 big UK listed trusts in the global sector, only Caledonia Investments and Scottish Investment Trust trade at a wider discount. Elliott also accuses the group of having opaque charges.

Tim Ingram, who was on the board of Alliance Trust between 2010 and 2012, sent a second open letter on Friday attributing the trust's poor performance to the group's failure to outsource its investment functions, relying instead on a "mediocre in-house team".

In its defence, Alliance says its performance has improved since it introduced a new management team and strategy in September, which was backed up to a degree by its solid first-quarter results published on Wednesday. Total shareholder return was 6.9 per cent, which ranks in the top quartile in its peer group.

Ms Garrett-Cox insists she has a strong investment team and that Alliance's charges and costs are transparent. At 0.60 per cent, she says its charges have fallen 20 per cent in 2014 and are in the middle of the range compared with other big UK trusts.

She admits costs have gone up, but adds: "We have had to spend money on infrastructure."

On remuneration, both she and Karin Forseke, her chairman, insist she is worth every penny, despite being paid more than 20 per cent than the boss of Henderson, a much larger listed investment group. This was a point made by Institutional Shareholder Services, the investor advisory group, in a critical note on Thursday that supported Elliott's move to bring fresh blood to the board.

Ms Garrett-Cox also insists shareholders, of whom 70 per cent are small retail investors, will support her.

For Elliott's part, it rejects Alliance's claim that it is seeking a quick profit. Certainly, its three candidates - Peter Chambers, the former chief executive of Legal & General Investment Management, Anthony Brooke, a former executive of SG Warburg, and Rory Macnamara, a former director of Morgan Grenfell - are experienced City grandees with strong track records and impressive reputations.

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