The battle for Alliance Trust

A 126-year-old institution is under attack from an American hedge fund for the second time in three years – and its fate rests on 60,000 private investors. Simon Wilson reports.

What is Alliance Trust?

Alliance Trust is the UK’s biggest investment trust, looking after £3.3bn of assets on behalf of private investors and institutions. The Dundee-based fund was founded 126 years ago and continues to manage all these assets in-house, unlike many rival trusts that have outsourced the management of their portfolios to external fund managers.

And that’s at the heart of its current problems. There has been grumbling among some shareholders about persistent underperformance and high costs for a few years. In 2012 Alliance saw off an attempt by an activist investor, Laxey Partners, to oust chief executive Katherine Garrett-Cox. But now it faces an even more serious challenge from its biggest shareholder.

Who is this shareholder?

The US hedge fund Elliott Advisors, which has spent five years building up a 12% stake – and has become increasingly critical of Alliance’s performance. Elliott is famously a pretty hardball outfit: it’s one of the “holdout” hedge funds that have been fighting the Argentinian government over its debt restructuring for more than a decade. Last week it upped the ante on Alliance, accusing the board of failing to address its concerns about costs and returns, as well as a “lack of openness”.

Elliott argues that changes at the top are needed to give the company “fresh perspective”, and has proposed three new non-executive directors for election to the board. These are Anthony Brooke, a former SG Warburg banker; Peter Chambers, former boss of Legal & General’s fund-management division; and Rory Macnamara, a restructuring expert formerly at Morgan Grenfell.

What is Alliance’s response?

It’s furious. Last weekend, Garrett-Cox retorted that the new non-executives would not be genuinely independent, that Elliott was looking for a quick profit and exit, and that Alliance will not be “bullied into doing something just because someone stands up and shouts at us”.

She described Elliott Advisors’ attempt to install the non-executives as the “thin end of the wedge” and “one step towards something that our shareholders are very unlikely to want” – namely, taking a disruptive short-termist outlook. “You get a fairly good picture of someone’s intentions,” said Garrett-Cox of Elliott, “when they tell you things like ‘dividends are a waste of time’.”

Any comeback from the hedge fund?

Absolutely. A person described by The Sunday Times as “a source close to Elliott” said the hedge fund had been surprised at how quickly Alliance Trust knocked back its proposal. “While I wasn’t expecting them to embrace it with open arms, we were hoping the board would at the very least consider it and sound out the shareholders,” he said.

“The fact they didn’t just validates our view that this board is totally out of touch and isn’t independent of the management. They are clutching at straws.” They haven’t explicitly called for Garrett-Cox to stand down, but the logic of their position certainly points in that direction.

Does Elliott have a point?

Lots of people think so. Alliance’s net asset value rose 8.1% last year – below the average for other similar global funds. It has also underperformed over one, three and five years. Over five years, it ranks 15th out of 29 global trusts for total shareholder returns.

That’s some way behind Scottish Mortgage and Witan (of its key big competitors) and just ahead of Foreign & Colonial. And Alliance is currently yielding a modest 1.9%, less than several of its major competitors.

Moreover, in recent months the trust’s shares have traded at a 14% discount to its underlying assets – double the average in the global growth sector – giving shareholders every reason to be concerned about its prospects. “I’m not really surprised [at Elliott’s move],” said Mark Dampier of stockbrokers Hargreaves Lansdown.

“[Alliance Trust] has lost its raison d’être. When it was a cheap actively managed fund that just about beat the market, that was OK, but when you’re charging more and you’ve got more competition, you’ve got to do more.”

So what happens next?

Despite being the largest investor in Alliance Trust, Elliott cannot force its directors onto the trust. So it has hired Boudicca Proxy Consultants, a firm that specialises in “proxy solicitation” (getting other shareholders to back your proposals) to try to win over the estimated 60,000 retail investors who account for 70% of the trust’s shareholder base.

So if you are an individual investor in Alliance Trust, you can expect to be courted aggressively by both sides in the run-up to a vote at the annual general meeting in Dundee on 29 April.

Who are Elliott Advisors?

Paul Singer, the former lawyer turned billionaire investor who founded Elliott Advisors in 1977 was once dubbed the “inventor of vulture funds”, says Deirdre Hipwell in The Times. One of the oldest hedge funds on Wall Street, Elliott made its name by forcing the government of Peru to pay $58m after suing over a restructuring of the country’s debt.

Here in the UK it employs around 250 staff and earns more than £100m in fees. But despite its fearsome reputation, not all its activist investor attacks on European companies have been successful. Attempts to force transport firm National Express to sell assets or merge with a rival, and supermarket chain Wm Morrison to demerge into operations and property divisions, both came to nothing.