Alliance Trust has pledged to make further changes later in the year following demands from shareholders and a run of poor performance, but analysts have warned that the 127-year-old trust is in danger of moving too far from its roots.
The £2.7bn trust has often been in the headlines this year after it was forced to make concessions to activist hedge fund investor Elliott Advisors, which had been pushing for changes in a public, often bitter, battle between the two parties.
FE Analytics shows Alliance Trust was up 2.74 per cent in the opening six months of 2015, beating its MSCI AC World benchmark but lagging the 5.86 per cent return by its average peer in the AIC Global sector. The portfolio’s net asset value total return was 1.4 per cent.
Performance of trust vs sector and benchmark over 2015
Source: FE Analytics
Its latest results, which cover the six months to the end of June 2015, add that the trust’s equity portfolio made a total return of almost 1.6 per cent over the period in question.
The trust says its equity holdings had been performing in line with the MSCI AC World over the opening months of the year, but performance suffered when bond yields spiked during the fixed income rout of the second quarter and prompted weakness in its equity income holdings.
“This has been a difficult period for investors. Key contributing factors include weaker economic growth from the US, resulting in interest rate uncertainty, an unexpected result in the UK general election, causing increased volatility, and the re-emergence of worries in Europe around a deteriorating economic and political position in Greece,” the report said.
“However, despite all this, and recent market moves, we have not changed our assessment that equities remain relatively good long-term value, particularly when compared to other asset classes.”
It must be noted that Alliance Trust’s equity team has outperformed relative to its benchmark since it took over responsibility for the portfolio in September 2014.
But it was Alliance Trust’s spat with Elliott Advisors that kept the fund in the public eye over the opening months of the year.
Elliott Advisors, which owns around 13 per cent of the trust’s shares and is the largest shareholder, was calling for widespread change at the investment company, arguing that a new approach was needed if it is to reverse its period of underperformance.
Performance of trust vs sector and benchmark over 2yrs
Source: FE Analytics
One demand was that three new members would be appointed to the board. A compromise was reached in April, when Alliance Trust appointed Anthony Brooke and Peter Macnamara – who had been nominated by the hedge fund – to its board, just ahead of an annual general meeting (AGM).
As part of the agreement, Elliott Advisors said it would not call a general meeting or “seek to agitate against the company, its board or management publicly” until after its 2016 AGM has been held – at the earliest.
In today’s update, Alliance Trust chair Karin Forseke said: “The first half of 2015 was a particularly challenging period for Alliance Trust. In the run up to our AGM a significant proportion of our shareholder base indicated that they sought change.”
“The board has listened to these concerns and is actively engaged in addressing them. The board anticipates announcing, in the autumn, the changes that it intends to make.”
There were no further details on the planned changes. The trust has already been through an overhaul – moving to a socially responsible investing (SRI) approach, appointing Peter Michaelis (pictured) as head of equities and trimming down the number of holdings. 
Numis Securities says it is “still early days” for the trust after the overhaul but warns that it is in danger of losing its identity after its recent changes – regardless of what is planned to be announced in the autumn.
“The successful campaign by Elliott highlighted that investors are no longer willing to put up with dull performance and a wide discount. We feel that Alliance Trust has lost its identity following so many changes to the investment team and mandate. It used to be regarded as a low cost, safe play that would tend to underperform in rising markets, but would outperform in weaker markets. However, this risk/return profile no longer applies,” the broker said.
“The move to an SRI bias is interesting, but if this approach fails to deliver a sustained improvement in performance it will become increasingly difficult for the board to ignore calls for more radical action, such as the appointment of external managers.”
The trust’s report makes clear that it will stand by the equity team’s investment approach, while noting that “uncertainty looks set to continue for some time”.
It expects a likely resurgence of the problems in Europe, the UK’s in-out referendum on the European Union, imbalances in the Chinese economy and the ongoing debate over when the Federal Reserve will make its first increase in interest rates to create clouds over the market.
“This rather downbeat backdrop and divergence of returns re-emphasises our belief that trying to second-guess the political and economic environment is not the key driver to stock selection. Our bottom-up analysis, which integrates our environmental, social and governance factors, allows us to value companies on their own merits and, on that basis, we continue to see opportunities in well-managed companies with strong fundamentals and sustainable long-term business models,” its report said.
“Many of the companies in which we invest have international exposure, providing protection from regional cyclicality or country-specific political uncertainty. We will continue to focus on analysing companies and their ability to generate superior returns over the long term for our shareholders.”
Alliance Trust’s equity team is positive on the information technology sector, both in developed and emerging markets. In 2015’s first half, it started new positions in Tencent, SS&C Technologies and Seagate.
Changes have also been made in its energy allocations with a position in Statoil being initiated and its weighting to Total increasing, and consumer positioning, with a new holding in TK Maxx owner TJX Companies being opened and a holding in Diageo sold to buy Ambev.
Numis said: “It is still early days, in our view, to assess the new equity portfolio managers, Peter Michaelis and Simon Clements. Since taking charge at the end of September 2014 the fund’s NAV is up 11.4 per cent versus a total return of 10 per cent for MSCI World and 8.7 per cent for the MSCI AC World (which includes emerging markets).”
Performance of trust vs sector and benchmark since Sep 2014
Source: FE Analytics
Alliance Trust has ongoing charges of 0.69 per cent, is trading on a 12.50 per cent discount and is 10 per cent geared.