This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

Alliance Trust Shareholder Forum

Alliance Trust Shareholder Forum

Yesterday (25/1/2017) Alliance Trust Plc (ATS) held the first of three meetings for shareholders to explain the outcome of the “strategic review” undertaken by the board of directors and the future investment management arrangements. This first meeting was in London and attended by a couple of hundred shareholders many of whom posed good questions.

More on the questions and answers below, but first let me give you some impression of the mood of the audience and an overview of where Alliance Trust now stands.

One would have thought that the audience would have showered the directors with plaudits for their activity in the last year, but one got the impression of mostly grumpy old men not being happy with the changes being implemented. After all the share price is up 34.5% over the past year at the time of writing. There are not that many stock market portfolios that will have achieved that. This has been helped by the share price discount closing to just over 5% which it is has not been near for years. The wide discount in the past was of major concern and put off new investors – it’s was also something that attracted hedge funds such as Elliott Advisors to stimulate some changes which were sorely needed.

The board has also disposed of Alliance Trust Investments, the subsidiary that managed the investments and not that successfully. It seems to have turned around Alliance Trust Savings (ATS) although there may be more to be done there.

Did shareholders really appreciate the regime of Katherine Garrett-Cox and Karin Forseke (CEO and Chairman)? I do not know many who liked it. The new board have taken some decisive steps to improve the company and make it look more attractive to new investors which is surely one aspect to aim for to enable the company to continue its historic role – namely to provide a low cost, global growth, actively managed stock market portfolio.

How are they going to improve investment management in future? By using Willis Towers Watson (WTW) to select a group of managers who will each manage their portfolios as they see fit. They are expected to improve the Trust’s investment performance further so that it is 2% ahead of their benchmark (WTW have experience of achieving this with other portfolios they advise on). It transpired the individual managers can also be fired at a moments notice if confidence in their abilities is lost. WTW had staff present who explained their investment manager selection process which appeared to be sound.

Will all this cost a lot of money, effectively increasing the charges on the Trust substantially? Well it will increase costs somewhat to say 0.6% p.a. but that will still be very competitive to similar investment trusts – less than two thirds of them they suggested. Note that the geographic/sectoral weightings of the Trust’s portfolio overall won’t necessarily be that different to what it is at present but the individual stock holdings might be very different.

Shareholders will get a vote on the proposed investment management changes at an EGM in Edinburgh on the 28th February. Alliance Trust shareholders should ensure they vote. The Alliance Trust Shareholder Action Group (ATSAG – supported by ShareSoc) is likely to give a voting recommendation at a later date.

Director Karl Sternberg did most of the talking for the board and answered most of the questions. I pick out a few questions and answers below (summarised for brevity).

  1. Who is managing currency risk plus who is controlling gearing? Answer: WTW monitor country and currency risk by weighting allocations to the managers. The future level of gearing will be a decision between the board and the managers.
  2. How are you going to manage the portfolio transfers to the new manager? The questioner also commented that buy-backs don’t work to manage the discount in his experience. Answer: Buy-backs are a short term palliative but they help to mop up loose holders. The transfer transaction will be done using a specialist transition manager who will keep costs down to an absolute minimum.
  3. What if the shareholders vote no? Answer: Then there would probably be another strategic review [and he hinted possibly board changes]
  4. What are the intentions of Elliott? Answer: The board is not aware of Elliott’s plans but they have consulted Elliott.
  5. Will we get an increase in dividends? Other trusts pay more. Answer: Alliance is not an income trusts. They think total return is what matters. [Comment: and rightly so – that’s all that really matters]
  6. What is the board going to do about ATS? Answer: ATS is now profitable. Confident it will be a success. It is now an independent subsidiary with a separate board. The questioner went on at some length on this topic and clearly saw owning ATS placed substantial risks on the shoulders of Alliance Trust shareholders. Another member of the audience spoke against disposal because it provided a low cost investment service to shareholders.

Conclusion and comments: This was a useful meeting and it was obviously focussed on the new investment policy and management approach. But there are some issues such as the Elliott stake that remain to be dealt with. An announcement on the previous day suggested the board would enable Elliott to participate in a buy-back at around the current discount level (i.e. a tender offer to them presumably as they cannot currently participate in buy-backs without prior approval of independent shareholders as they have such a big stake). However, press articles have suggested Elliott are looking for a better deal than that which is surely problematic as it would mean a general tender offer at a nil or very small discount, or some preference to them.

As regards the “multi-manager” approach this certainly seems worth trying and other investment trusts have run similar arrangements successfully. The resulting cost structure does not look unreasonable, if the target performance is achieved, or anywhere near.

One did get the impression from the questions/answers and talking to a few of the attendees that some shareholders would like to revert to the original structure of a self managed, low cost trust based in Dundee. That is probably not a viable structure in the modern investment world, if it ever was if good performance is to be achieved. Hardly any investment trusts follow that model now. And a fully non-executive board as the company now has is much sounder. I suggest shareholders should put more trust in the new board than they demonstrated at this meeting because all they have done to date seems reasonable to me and as good a way forward as any.

Postscript: Soon after the above meeting the company announced that it had agreed to repurchase all the shares held by Elliott (19.75% of the share capital) at a discount of 4.75% to the prevailing NAV. That would be done in five tranches, subject to shareholder approval – resolutions to approve will be put forward at the forthcoming EGM. The repurchase will add about 1% to the company’s net asset value per share to the benefit of other shareholders. In addition the board advises that in future it will buy back shares at or around the same level in the market, so effectively all shareholders are being treated equally.

Roger Lawson

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