‘Skin in the game’ at Alliance Trust

I’ve written here before about the Alliance Trust, the UK’s biggest investment trust. I interviewed Katherine Garrett-Cox, its manager, last year and ended up thinking that the market was being a little unkind to the company. The shares were trading not far off a 20% discount to their net asset value and everyone was having a go at Garrett-Cox for not doing something to pull it back in.

At the time, I said that I thought the shares might be a buy. And it turns out they probably were. The final results this year show that total shareholder returns over the year came in around 5% better than that of the generalist trust peer group.

This was thanks in the end to Garrett-Cox and her board getting on with a huge share buy-back programme (this improves returns by increasing the net asset value of the shares still on the open market and by pushing up demand and so closing the discount). Overall, Alliance has bought back around 10% of its shares.
There’s a lot more to be done here if Garrett-Cox wants the trust to consistently trade on a discount of under 10% (which should be a minimum aim for a trust this liquid). According to Collins Stewart’s Alan Brierley, Foreign & Colonial and Witan (two competing generalist trusts) have been pushing harder to cut their discounts, buying back 25% and 37% respectively.

But at least the discount is down to 15% and it is clear to the market that a reasonable start has been made on task in hand.
The actual performance of the underlying stock selection (which is supposed to be Garrett-Cox’s forte) has not been particularly good (Brierley calls it “indifferent”). But the investment management team has been strengthened, so it is possible that some crucial improvements here might follow.

I’m still interested in the trust (although irritatingly I never quite got around to buying it last year) on the basis both that the basic fund management performance could improve and that the discount is likely to close from here.

The buy-back programme should continue, and the the RDR rules coming in later this year are likely to increase the demand for shares in well-known investment trusts. Brierley agrees – he has moved his view from ‘hold’ to ‘add’ (ie from ‘don’t bother buying this’ to ‘think about buying this’).

One last thing: Garrett-Cox has real ‘skin in the game’ (ie she has invested her own money). She might be overpaid on £840,000 a year, but her personal investment in the trust stands at £1,278,830. Skin in the game from managers is good.