IN the financial industry the investment trust world is still seen as being populated by "eccentrics and cranks", Baillie Gifford partner Edward Hocknell told the firm's conference this month.
However, every so often the affable, clubby air of the industry created by Scottish Victorians receives a mild electric shock when activist investors buy into a trust, build a stake, and launch an attack on its management.
Alliance Trust faces that music at its annual meeting in Dundee on Friday, as Laxey Partners tries to rally support for reforms backed up by a claim that many big institutional shareholders are losing patience with Alliance’s management.
Mr Hocknell went on to argue that for a fund house, picking long-term winners and sticking with them matters more than market timing or even valuation.
“The pressures to sell were massive in autumn 2008 to spring 2009, and one of the best things Baillie Gifford has ever done is doing nothing during that period.”
Alliance Trust also weathered the storm respectably, under Katherine Garrett-Cox, who arrived as chief investment officer in May 2007 and became chief executive in 2008.
Over one and three years the performance of Dundee’s sector giant at least matches that of sector rivals, and the share price has outpaced fund growth, to narrow the discount.
Ms Garrett-Cox is adamant that performance is on an improving trend. She has cut UK exposure from 47% to 32% since 2008 and last year upped equity exposure to 97% as property and private equity was jettisoned. Over the past six months, the trust is well ahead of its closest competitors.
Over five years, however, Alliance trails its rivals heavily on fund growth, and even more on share price.
It is that legacy, along with its business model of running financial services subsidiaries alongside the £2.5 billion investment trust, that has given ammunition to activist investor Laxey Partners.
In a briefing last week Chris Agar, a director of Isle of Man-based Laxey, responded to criticisms of being a short-term speculator by saying Laxey had been a “shareholder since 2009”. By the time Laxey went public last November with its call for reforms at Alliance, it had amassed a 1.3% holding (worth £325 million).
The trust’s discount was above 20% in 2009, and it is already down below 14%, so if Laxey succeeds in getting support for a mechanism that would effectively reduce the discount to 10% and keep it there, it will make a lot of money. But so, it argues, will all other shareholders.
Laxey has opened up a second front on Alliance in an attempt to ramp up support ahead of this week’s meeting. It claims that the real cost of running the trust is not the £17m attributed to operating the fund but the £41m costs of the company as a whole, more than doubling its reported total expense ratio (TER) of 0.63%. Charles Cade, analyst at Numis Securities, says the argument is a red herring and there is “little justification” to include the costs of the group’s savings and unit trust subsidiaries.
He agrees the firm’s current losses of £8.8m perhaps ought to be included in the TER, which would increase it by 50%, but adds: “We believe that both businesses have the potential to move into profitability within the next few years, and it could therefore be argued that investors should attribute value to the future net cash flows ... It is too early to perform such an exercise, but it does highlight the flaws of focusing simply on costs.”
Opinions are mixed within the industry on buybacks. They have been adopted by three direct competitors – Witan, Scottish Investment Trust and F & C – but not by others such as the Baillie Gifford trusts. James Budden, marketing director at BG, points out that most trust boards have committed themselves to a discount control mechanism, but many have failed to operate it when the going got tough – for sound investment reasons.
“It is not proven that it is the right answer,” Mr Budden says. “We believe in giving boards the ability to do things tactically.”
Mr Cade at Numis agrees, noting: “Some boards have back-tracked from previous commitments once market conditions have changed, which can be counter-productive if the aim is to build a loyal shareholder base.”
Mr Cade says some of the Alliance board’s arguments in defence of its flexible buy- back policy are “rather spurious” or “exaggerated”, and notes Alliance, having irritated shareholders in the past by only buying back large blocks of shares from big investors at discounts in private deals, has changed tack this year buying back £18.4 million worth of shares in 10 transactions.
Laxey claims the credit but says the buybacks appear “random” as no purchases were made when the shares were at recent lows.
Market maverick Terry Smith recently turned his attention to buybacks generally, and concluded they do not add value for shareholders.
In his latest diatribe, Mr Smith says: “Share buybacks only create value if the shares repurchased are trading below intrinsic value, and there is no better use for the cash that would generate a higher return. Most share buybacks destroy value for remaining shareholders, and management is able to get away with this as the current accounting for share buybacks conceals their true effect.”
Mr Cade said: “A rigid commitment to protect a 10% discount may lead to a short-term gain for investors, but it could lead to a significant shrinkage of the fund’s capital.”
His 15-page analysis identifies 12 different factors affecting supply and demand for a trust’s shares, but says evidence from rival trusts shows that investment performance is the key to narrowing the discount.
However, he agrees with Laxey that Alliance’s failure to adopt a clear benchmark should be remedied, suggesting a suitable target might be for the total return to be measured against the FTSE world index over three or five years.
‘‘
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article