Alliance Trust changes affect £2bn of third party funds

Alliance Trust Plc, one of the biggest listed investment companies in the UK, has announced sweeping changes to the way its board works, the way its investments are benchmarked, and how much the manager of the Trust – Alliance Trust Investments – will be paid.

The changes come after a period of concerted efforts by shareholders to improve the so called discount to NAV, which tend to apply to UK listed investment companies, or closed ended investment trusts. Analysts at Numis have noted that Elliot Advisers has added to its stake, now holding some 14% of the company shares valued at some £365m. If the proposed changes do not result in a sustained narrowing of the discount to NAV, then it may be that further action is required, Numis warned.

Broadly speaking, AT has said that the investment company will:

  • Dispose of non core investments as it focuses on global equities
  • Introduce the MSCI All Country World Index as a “formal benchmark”
  • Introduce significant cost cutting to the management fees; the investment mandate will be awarded to ATI at a rate of 35bps on average NAV, but there will also be a target for the so called ongoing charges ratio of 45bps “or less by the end of 2016” versus 60bps recored for 2014
  • Commit to further share buybacks to narrow the discount to NAV
  • Commit to delivery of “progressive dividends” as well as all net income to be paid out as ordinary dividends

Perhaps most significantly AT is introducing a fully independent board, comprised solely of non executive directors. This will affect the management of ATI, Numis notes because “Susan Noble will become chair of ATI and will retire from the board of Alliance Trust plc, Katherine Garrett-Cox will continue as CEO and a director of ATI and will step down from the board of Alliance Trust PLC, Alan Trotter, CFO, is to leave Alliance Trust.”

“It is not quite clear where the changes will leave Katherine Garrett-Cox in the long term. Her influence over the Board has been significantly reduced and we assume that her pay structure will reflect the change in responsibilities,” Numis stated.

House broker JP Morgan Cazenove added in its note: “The Board did look at alternatives to the current team, but saw no compelling reason to change horses given the incumbents were successfully meeting their objectives.”

“But clearly with a shorter notice period it will be possible to change or to add new managers to the roster in the future. To that end, new director Karl Sternberg will chair a ‘Management Engagement Committee’ to review investment performance regularly, with a full review undertaken if performance does not consistently deliver and external managers then considered. The property portfolio, mineral rights and fixed income portfolio will be sold and the PE portfolio run-off.”

In terms of other assets managed by ATI, Numis said that there is potential impact, given the £2bn of third party assets that ATI oversees via a distribution agreement with Aviva.

It said that last year there was an average fee on third party assets of about 46bp, but under the new rules outlined by AT’s board, the investment mandate awarded to ATI will be done so “at a rate of 35bps on average NAV – one of the lowest in the industry.” It is unclear if there will be similar pressure from owners of third party assets to cut management fees.

JPMC added that “ATI is expected to be profitable by the end of 2016” and stand on its “own two feet” as a result of the changes announced.

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