Alliance Trust: truce and consequences

In business as in politics, some alliances are forced. The UK's Labour party may insist it will not team up with the Scottish National party, but it may have no choice if it wants to govern. Similarly, the brave hearts fighting to keep control of Alliance Trust have cut a deal with its challengers - but the siege is not over.

On Tuesday, Alliance Trust reversed its stance towards US activist investors Elliott Advisors, granting some board seats to "independent" (that is, Elliott-approved) directors in return for an end to further agitation until the 2016 annual meeting. This suggests fear, not compromise. It appears that too few shareholders supported chief executive Katherine Garrett-Cox's effort to fight off the invaders. This, and the fact that underlying performance problems remain, make for an uneasy alliance.

Only two of the recommended three non-executive directors will join the board. Elliott went a bit far demanding three board seats, given that it has only a 10 per cent voting stake in Alliance Trust. The rejected nominee, Peter Chambers, former chief at Legal and General, had ironically the most relevant experience of Elliott's three. How the third director is chosen may mark the next line of battle.

One key issue for the future is whether the compromise rattles the troops at Alliance Trust. Knowing that invaders have been invited for a parley may mean the rank and file look askance at their leadership - especially when one of the invaders' aims is to permit external management of the Trust's investments to improve performance.

The recent noise from Elliott has reduced Alliance Trust's discount to its net asset value by a couple of percentage points, to 11 per cent. Shareholders will want more. The core issue at Alliance Trust - a fee structure that seems a poor fit for a fund highly correlated to its benchmark - remains. Elliott has agreed a one-year truce to help heal recent wounds. But the walls have been breached.

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