Elliott Advisors wary of Alliance Trust changes

Activist investor Elliott Advisors thinks the shake-up at Alliance Trust announced today is just the first step to solving performance and discount problems at the investment trust, Fundweb understands. 

An anonymous source close to Elliott Advisors, which has a large stake in Alliance Trust, says only time will tell if the shake-up will actually boost performance.

Alliance Trust today revealed changes to the trust, including targeting £6m of cost cuts, establishing a formal investment management contract with Alliance Trust Investments and creating separate boards for the trust and ATI, in a bid to boost performance and accountability.

“The way [Elliott Advisors] see this is it’s only the first step towards solving problems defined earlier this year,” says the source. 

“Whilst it’s good to see the new-look board asserting itself quickly, the success of the steps is only evidenced by the performance of the equities team and the discount, which is the ultimate measure.”

A key focus for Elliott Advisors is narrowing the discount Alliance Trust is trading at. The average sector investment trust discount is 5 per cent and Alliance Trust is trading at an 9.6 per cent discount this morning despite a pickup in the share price following the announcement.

The source said Elliott Advisors is in “wait and see mode”.

The activist investor pledged ahead of last year’s AGM that it would not agitate until after next year’s AGM.

However, earlier this month it increased its position in Alliance Trust from 12 per cent to 14 per cent of the trust. The move shows the company’s “commitment to the investment and that they are long-term holders,” says the source.

Elliott is not alone in being unconvinced by the changes at the trust. 

Laith Khalaf, senior analyst at Hargreaves Lansdown, says that while the changes look good on paper “the proof of the pudding will be in the eating”.

“Long-term investors could either view this as a clean slate, or as a return to square one,” he says. 

Among the changes is Alliance Trust’s shift in asset allocation, selling its fixed income, property and mineral rights and focusing more on global equities. While this is “a positive step” the assets occupied a small portion of the portfolio.

One of Alliance Trust’s justifications for keeping ATI running the investment management, rather than outsourcing to external managers, was the recent strong equity performance.

Alliance Trust says the equity performance was 2.3 per cent higher than the world equity index since the team took over in September last year, but Khalaf says this could be a red herring.

“A good start, however, this is against a backdrop of a collapse in oil and mining shares, which would not easily find their way into an ethically screened portfolio like Alliance Trust. It is also clearly a very short timeframe over which to judge performance,” he adds.

It is still too early to assess the new team’s performance, say analysts at Numis, but the move to change the asset allocation is positive.

“There will continue to be pressure on the team and if the SRI approach fails to deliver a sustained improvement in performance it will become increasingly difficult for the board to ignore calls for more radical action,” say the analysts.

But Elliott Advisors remains a big factor in the future of Alliance Trust, says Khalaf. “The elephant in the room is still of course activist investors Elliott Advisors, which owns a significant minority stake in Alliance Trust,” he says.

“Elliott may well be placated by these recent changes. In any case it has agreed not to agitate against Alliance Trust until the next AGM, which is scheduled for May 2016. At this point the gloves come off, and who knows if Elliott will start swinging again,” Khalaf adds.