Most of the commentators in this issue have focused on trusts they like. I’m going to write about three widely held ones of which I’m sceptical. First, there’s Alliance Trust, which has been struggling for decades to perform and narrow the discount of its shares to net asset value (NAV) – see below.
Historically, high exposure to the UK market held it back but at least its costs were low. Former chairman and chief investment officer Katherine Garrett-Cox struggled to improve performance, but significantly increased costs. Since new managers were appointed in 2014, Alliance has continued to modestly underperform.
Now the board proposes to give up on direct control of its investments and has hired Willis Towers Watson to select eight external managers, each to run a focused portfolio of 20 “best ideas”. Willis’s 100-strong research team, which supports $87bn of investments, and its vast advisory business, sound impressive, but, as Jim Slater used to say, “elephants don’t gallop”. Nor is investment by large teams with decisions filtering through endless committees a recipe for success. A shrinking discount to NAV means that Alliance Trust’s shares have recovered over the last year, but investors should take the opportunity to switch to the more focused Witan Investment Trust (LSE: WTAN).
Neil Woodford’s Patient Capital Trust was launched with much fanfare in 2015. Woodford made his name at Invesco investing for income, largely in big companies, but he also had modest exposure to early-stage companies. Patient Capital turned this into the main focus of investment. The top ten investments, 50% of which are unquoted, account for more than half the portfolio. Two-thirds of the portfolio is invested in healthcare, and more than half is in early-stage companies.
There is much to admire in Woodford’s approach: his commitment to UK innovation, his long-term approach, and the absence of an annual management fee. However, initial plans for a £200m fund met with such enthusiasm that the issue was expanded to £800m. The independence of the non-executive directors at launch was compromised by being drawn from companies in which Patient Capital was invested. Most importantly, Patient Capital’s optimism about UK healthcare innovation looks premature. Bad news, such as with Circassia Pharmaceuticals, has preceded any good news, and the shares trade 5% below the issue price on a small discount to NAV. The news could get worse and the discount widen sharply before, perhaps, it gets better.
British Assets has been plying its trade since 1898. It was the first share I ever owned, but some 40 years ago, after some serious volatility, I sold the shares to finance some travelling, a decision I never regretted. The trust was struggling to perform under Foreign & Colonial and traded at a persistent discount to NAV, so in 2015 it was bundled off to BlackRock and became the BlackRock Income Strategies Trust.
After nearly two years and an 18% drop in NAV, the board has realised its mistake and switched again to Aberdeen Asset Management, who propose to merge BIST with their own Aberdeen UK Tracker Trust. The combined trust will be managed by Aberdeen’s multi-asset team and renamed Aberdeen Diversified Income and Growth, but I’m not holding out much hope for this new iteration. Investors wanting a multi-asset fund should consider switching to Ruffer Investment Company (LSE: RICA), Troy Income & Growth Trust (LSE: TIGT), Personal Assets Trust (LSE: PNL) or RIT Capital (LSE: RCP) instead.
Activist watch: Alliance pays off Elliott
Alliance Trust has agreed to buy back shares belonging to activist hedge fund Elliott Management after several years of the latter pushing for management and structural changes at the long-struggling Dundee-based group, says Lauren Fedor in the Financial Times. The investment trust said last week that it would repurchase Elliott’s 19.75% stake in five instalments, at a 4.75% discount to its NAV, for a total cost of £620m. This is part of a larger share buyback scheme that is intended to bring the trust’s shares closer to NAV.
Elliott, which is known for aggressive activist tactics, has repeatedly targeted Alliance Trust since it first took a stake in 2010, criticising the group’s poor performance, high costs and loss-making subsidiaries. The fund successfully pressured Alliance’s board to appoint its suggested independent directors and also managed to bring about the ousting of former chairman Katherine Garrett-Cox.
Elliott’s activism has “resulted in a far more attractive vehicle for all shareholders”, says broker Numis. Alliance “now has a fully independent board and a clear strategy to deliver… shareholder returns”.
In the news this week…
Nick Train of Lindsell Train, who manages the Finsbury Growth and Income Trust, has not decided what to do with his stake in Pearson, he told investors at the trust’s annual general meeting last week, says Danielle Levy on Citywire.co.uk. The struggling publisher issued its fifth profit warning in four years in January, prompting its shares to fall by 30%. Pearson also announced that it would cut its 2017 dividend and that it plans to sell its stake in Penguin Random House. The stock is now down by 60% from its high, set in March 2015.
Pearson has made a “horrendous start to the year” and faces “worrying issues”, said Train. Still, “every company will go through a tough time. If you ask me or Mike [Lindsell] what is it that has allowed us to deliver what we regard as long-term acceptable returns, I would say it has been our willingness to take the rough with the smooth and to see these things out.” “All I can say is that you and we had better hope that we have the wisdom to make the right call here.” Lindsell Train holds Pearson in the Lindsell Train investment trust and the Lindsell Train UK Equity and Global Equity funds as well as in Finsbury.