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Alliance Trust AGM

I was unfortunately unable to travel to the Alliance Trust AGM in Dundee as I hoped to do because of a medical problem, but here is a report from Jim Cook:

Alliance Trust 2016 AGM, Dundee, 6th May 2016

The AGM was well attended with around 300 shareholders represented. In his opening remarks Lord Smith explained why he had accepted the Chairmanship. Firstly, the company faced challenges.  Secondly, what needed to be done had been identified.  Thirdly, a plan was in place.  Lord Smith said that his final check was to make sure that the “people” could deliver the required changes and he was satisfied that they could. Against the background of the Trust’s long established deep, rich, heritage, Lord Smith felt he could add value.  The Trust mattered to the shareholders, the staff, and the companies in which the Trust had invested.

Early in his remarks he dealt with Katherine Garrett-Cox’s termination package. This was what had to be paid in law, but was no more than the terms of her contract.  On the question of the non executive directors’ current remuneration, this reflects the magnitude of the tasks but “will be kept under review” when a steady state has been achieved.   On the composition of the Board, in the past the Trust was in the vanguard of Board diversity but currently has no women.  Lord Smith now has a short list of very able female candidates and hopes to make an appointment soon.

All the investment properties other than the Dundee office have now been sold. Fixed interest holdings will be liquidated by mid-year.  No more private equity investments will be made.  Mineral rights have been retained but will be sold when good value can be obtained.  The new focus is, therefore, on equity investment.

Turning to the two subsidiaries, at ATI costs have been reduced to reflect the scale of the operation. ATI is trying to create a distinct identity.  At ATS, the Stocktrade acquisition has helped to build scale and organic growth has also been good.  A big investment in technology in being undertaken (but is running behind schedule).  The AT Board is “challenging ATS management to deliver a profit in 2016 and beyond”.  Lord Smith was at pains to put the ATI and ATS subsidiaries in perspective.  They represent only 2.2% of the gross assets of the Trust.  A key objective is to realise the underlying value in these subsidiaries.

Peter Michaelis, chief executive of ATI, then gave a presentation on ATI’s performance up to 31 December 2015 and its investment process. ATI aims to identify companies with strong business fundamentals, excellent operational management, and adaptive and innovative attitudes.  The emphasis is on companies seeking growth independent of aggregate GDP.  There is also an overlay of a screen of the environmental, social responsibility and governance aspects of each investment opportunity.

Peter and his team have been running the Trust portfolio since October 2014 and the performance statistics from then until 31 December 2015 were good. For the future the target is to outperform the MSCI ACWI benchmark by 1.5% per annum (i.e. 1.0% net of fees).  Various parameters relative to the benchmark were displayed which demonstrated that the Trust’s portfolio is differentiated, favourably, relative to the benchmark.  The benchmark has 2,000 stocks from which the Trust has selected 60.  The Trust’s active share is, therefore, 91%.  The presentation concluded with examples of two investments which had been successful, namely, Johnson Matthey and Thermo Fischer, and two investments which had not been successful, namely, Norsk Hydro and Delta Lloyd.  Peter emphasised the low turnover of the portfolio based on good stock selection skills.

Before taking questions, Smith disclosed that the bonus awards in 2015 had recently been found to be “slightly overstated” in the 2015 accounts. This, he said, did not prevent the accounts being approved and the error would be remedied in the 2016 accounts.

A wide range of questions were raised with a high proportion relating to ATS. ATS statements, for example, do not give the book cost of the investments.  Why?  Patrick Mill (ATS CEO) said new technology would remedy this later this year.  Service standards at ATS were claimed by one shareholder to be poor.  Patrick Mill confessed that the new IT system is running “more than a year late”.  He also admitted that while ATS is good at dealing with direct customers it needed to improve its dealings with IFAs. Gregor Stewart emphasised that platforms are the way forward. Stocktrade was integrated last weekend.  The key to the future is a) technology and b) customer service. Asked if the IT delay at ATS would result in a cost overrun, Patrick Mill said that it is time, not cost, that is the issue.

Questions on the quality of the new Board included publicity – what can the new Board do to keep up publicity?  The answer focussed on investment performance as the key.  A shareholder said that while the Board have impeccable credentials are they independent?  There were strong assurances all round although Karl Sternberg disclosed that his Scottish mother (nee Galbraith) was a significant shareholder and had “told him to take the job”!  On female directors, a (female) shareholder said the company should recruit the best directors irrespective of their gender.  Lord Smith said the short list of female candidates was very impressive.

On the error in the bonus a shareholder pointed out that a similar error had occurred in 2013. He said the latest error was £100,000 and not as trivial as the Chairman had claimed. Why did the auditors not pick this up? Deloitte answered that they only do sample testing.  Gregor Stewart said an internal investigation was being undertaken.  The overage in 2013 was paid back.

A shareholder asked why was there no beauty parade of potential investment managers last October. Gregor Stewart said that at that time performance was looking good and therefore it was deemed appropriate to continue with the existing team.  Implementation of a benchmark was, however, a major change in corporate governance.  If cost and performance is not satisfactory the contract with ATI can be terminated.

Asked about the discount, Lord Smith said there are not a lot of sellers of Alliance Trust shares but not (yet) enough new buyers to naturally narrow the discount. Buy backs were therefore an ongoing feature of the Board’s strategy.

Our overall assessment is that the company is in much better hands. Lord Smith was very impressive and while he said that much had been achieved over the past year, he left the meeting in no doubt that much remains to be done to return the Trust to its former glory.

Roger Lawson

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