Good news for shareholders: Dundee-based investment firm Alliance Trust has made significant changes to the way it runs money, the board and fund fees, bowing to pressures from its main shareholder, US-based Elliott Advisers.
The troubled firm runs Alliance Trust (ATST), the largest investment trust in the UK at £2.5 billion, which Morningstar fund analysts rate Neutral, reflecting the considerable changes at the Trust in recent years.
The most recent announcements are due to come into effect in March 2016, and aim to simplify the business and cut £6 million in costs by the end of 2016. The news, including that fees would be cut by 25%, has been received well by shareholders, causing the share price to bounce and the discount on the trust to narrow.
Performance is also under scrutiny under the new regime; the investment trust returned 22% to investors in 2013, 9% last year but has struggled this year.
Chief executive Katherine Garrett-Cox will be stepping down from the board to head up Alliance Trust Investments (ATI) the firm’s investment fund management division. But if the performance does not improve, Elliott Advisers is expected to push for further changes to management, with Garrett-Cox likely to face the axe.
Earlier this year Garrett-Cox spent £3 million in legal fees warding off proposals from Elliott Advisers to make changes to way Alliance Trust is run. This about turn has been costly, but expected to be beneficial to shareholders in the long term.
Lower Fees and Charges
The board have negotiated a new investment management fee of 0.35% a year, regarded by the board as standard industry terms, and are seeking other reductions in costs of £6 million to bring the ongoing charge down to 0.6% in 2016.
Jeremy Beckwith, Head of UK Research for Morningstar says this will mean Alliance Trust will become one of the lowest cost investment trusts in the market.
“As it should be given it is one of the largest and there are substantial economies of scale in investment management,” he concludes.
Changes to the Portfolio
There is a new investment management contract to manage a global equity portfolio with a clear benchmark – MSCI All Country World Index – and a performance target of 1% above this, net of fees; the contract can be ended with six months’ notice from either side.
The investment trust will now focus on equity investment, and sell of most of its bond holdings and alternative investments, reinvesting the proceeds into global equities. The new investment mandate will be simple and very transparent.
Beckwith notes that Garrett-Cox has been managing money on a strong socially responsible investing (SRI) basis – but now the Board of Alliance Trust is giving the managers a straightforward global equity mandate and benchmark with no mention of SRI in it.
“If SRI has a phase of underperformance relative to MSCI then this could prove problematic, and ATI could lose the mandate,” he warns.
Positive Changes for Shareholders – But Some Clarity Needed
Morningstar fund analyst Randal Goldsmith attended the briefing and said that while the most of the changes seem positive from a shareholder perspective, some of the changes do not appear to have been fully thought through by the board and were unclear.
“Disposing of non-core investments, reducing fees and a commitment to reducing the discount and simplifying the board structure are positive changes,” said Goldsmith.
“When questioned about the application of the new benchmark to assess performance and on the commitment to narrowing the discount the board was inconclusive. It appears the focus will be on performance of the global equities portfolio, but it may include non-core investments in the short term.”
