Alliance accuses Laxey of short-term self-interest

The embattled board of investment trust Alliance Trust has accused activist investor and minor take holder Laxey Partners of being motivated by its own short-term interests rather than the medium and long-term prospects of all Alliance Trust shareholders.

The accusation was made in response to a call last month by hedge fund Laxey for a vote at the firm's next Annual General Meeting (AGM) on whether a comprehensive review of the company should be undertaken. Laxey wants to explore ways to boost the investment performance of the company and to reduce the discount of the share price to net asset value per share.

"This review should include the possibility of externalising the investment management of the company's portfolio and should also bring forward proposals which would enable shareholders who wish to sell their ordinary shares, to do so at a price which more closely reflects net asset value," the requisition notice said.

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Alliance Trust does not employ an investment manager and manages its own investment portfolio. Laxey's request for Alliance to consider outsourcing its investment management has alerted a number of asset managers to the possibility of landing a lucrative gig.

Aberdeen Asset Management Chief Executive Officer Martin Gilbert has already thrown his company's hat into the ring saying he would "love the opportunity to pitch for the trust," according to the Daily Telegraph.

Not surprisingly, the existing management of Alliance Trust has not welcomed this proposal with open arms. It argues that externalising the investment management of the portfolio would have a negative impact on the company's ability to align the interests of its shareholders and investment managers.

Over the last year, Alliance Trust has delivered top quartile investment performance at bottom quartile cost, the board's feisty response to Alliance notes.

Nevertheless, Aberdeen's boss reckons his firm's management fee would undercut Alliance's own in-house arrangements. Alliance has a total expense ratio of 0.98%, a rate which has also attracted the ire of Laxey Partners.

As for Laxey's call for a scheme to allow shareholders to dispose of their shares at a price closer to the trust's net asset value (NAV) per share - what the value of the shares would be if all of the investments in the portfolio were liquidated at current market prices - the Alliance board noted that Laxey's proposal is similar to the one it made at last year's AGM, and which was soundly rejected by two-thirds of those who voted.

Alliance has, in any case, been buying back its own shares as a way of reducing the discount to NAV. This has narrowed and greatly reduced the volatility of the discount, Alliance claims.

According to stockbroker Numis, Alliance Trust repurchased £246m of its shares in 2011, equivalent to 10.3% of its share capital, adding 1.7% to the NAV return.

It is not at all uncommon for investment trust's shares to trade at a discount to NAV, but Alliance Trust's discount has been wider than many of its rivals for some time; as of April 3rd, the shares were trading at a 17.5% discount to NAV.

Laxey, which owns just 1.7% of Alliance Trust's shares, has called for the company to increase its dividend in the light of tax changes which allow investment trusts to pay out dividends using money made from profitable investment sales.

Alliance Trust's response has been to note that last year it hiked its dividend by the most it has in 20 years.

"We are disappointed that Laxey has requisitioned the board again, having been convincingly defeated last year," said Alliance Trust's Chairman, Karin Forseke. "This persistent requisitioning wastes shareholders' money and demonstrates Laxey's short-term attitude to its investment," Forseke claimed.

In case Laxey and its fellow shareholders had not got the message, Forseke added that "the board believes strongly that this resolution is not in the best interests of all shareholders."

"It is crucial that all shareholders make their voice heard and vote at our AGM on 27th April, and we strongly urge them to vote against Laxey's resolution," Forseke concluded.

JH