20 April 2018

From the Times Tempus column. First published 19 December 2017.

Alliance Trust turnaround starts to pay off

After years of upheaval and boardroom struggles, most investors in Alliance Trust would doubtless welcome a return to its core principles of picking growth stocks and raising its dividend.

The £3 billion investment trust has made quite significant progress in its efforts to do just that this year. It received backing from its shareholders in February to buy back the 19.75 per cent stake owned by Elliott Advisors, the activist investment group that had laid siege to its boardroom for several years after first taking a holding in 2012.

It was a symbolic end to one of the trust’s most tumultuous periods.

Alliance was formed in 1888 in a merger of three mortgage and land-owning companies in Dundee. It still has its headquarters there but is now a FTSE 250 constituent with operations in Edinburgh and London.

Elliott had been dissatisfied with its performance and believed that the cost base was too high. It raised concerns over the pay package of Katherine Garrett-Cox, when she was chief executive. Its campaign, which was supported by other shareholders, led to the departure of most of the board, including Ms Garrett-Cox and Karin Forseke, the chairwoman.

Lord Smith of Kelvin joined as chairman in January 2016 with a mandate to lead a turnaround and review operations. As part of the new approach the board is made up entirely of non-executive directors.

This year shareholders approved a deal to sell the management division, Alliance Trust Investments, to Liontrust Asset Management; the portfolio will be run by separate managers around the world. Willis Towers Watson was brought in to manage that process and the trust began to implement the changes started in April. This initially involved the sale and purchase of shares worth £4.5 billion in an overhaul which meant that only 4.6 per cent of the portfolio was retained.

The Alliance board committed to maintaining its progressive dividend policy, which has 50 years of unbroken growth, and is looking to outperform the MSCI All Countries World Index by 2 per cent. So far the outsourcing strategy, which involves eight active fund managers all picking their favourite stocks, appears to be paying off.

The return from the trust’s equity portfolio was 2.4 per cent ahead of its benchmark for April to November. The share price is on an upward curve. It was 685p at the end of March; in recent days shares have been changing hands for about 740p.

The biggest changes to the holdings have been completed but there are still exits and additions. Alliance trimmed its exposure to Safran, the French aerospace and security conglomerate, and Nielsen, the data management group, last month. Anthem, the health insurer, and Tencent, the Chinese internet company, moved into its top 20 holdings on the back of its own strong growth. Alliance recently added positions in Fleetcor Technologies and Nvidia, both technology ventures based in the US.

The trust is trying to narrow the discount at which its shares trade relative to the value of its holdings. Before the current regime the discount was a double-digit percentage but in recent months it has been about 5.3 per cent. To cut it further the trust continues to purchase its shares for cancellation.

Research from Winterflood shows that Alliance was the largest buyer of its own shares in the investment trust sector this year with £993 million of purchases; two thirds of that relates to the Elliott deal. Demand for buybacks has fallen since April but it gives shareholders another option should they wish to reduce their stake.


WHY: Early performance of its new regime is encouraging and there appears to be further upside in the short and medium term as that beds in.


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