The embattled Alliance Trust has been accused of using shareholders’ money to prop up a failing investment business rather than focusing on delivering performance.
Shareholders have endured a number of years of financial losses by Alliance Trust Investments, an open-ended fund manager that is a sub-venture of Alliance Trust.
The firm has only gathered £1.9bn of external investments, with the main Alliance Trust portfolio featuring as its biggest investor in several of its funds.
The trust has a £190.3m position in Simon Clements’ £203m Global Thematic Opportunities fund, for example, but Mr Clements’ fund has lagged the MSCI AC World index by 16.3 percentage points since launch in December 2011, according to FE Analytics.
Meanwhile, the Monthly Income Bond fund, which Alliance Trust has £124m invested in, underperformed its benchmark by 23 percentage points since launch in June 2010.
Experts have asked why shareholders have had to endure losses not only from the asset management venture, but its investments in its poor-performing funds.
Tony Yarrow, founder of Wise Investment, said the figures were “damning”.
“They are propping up a failing division of the company with internal money, rather than taking the knife to the whole enterprise.”
Rory Maguire, managing director at ratings agency Fundhouse, said the Global Thematic Opportunities fund’s portfolio was similar to Alliance Trust’s, suggesting the trust had not bought the sub-fund for reasons such as diversification.
“Quite noticeable, I think, is that the trust allocates to internal funds with the shortest track record,” he said.
“This is, all else being equal, odd. It does, again, make the sceptic in me wonder whether they are allocating to internal funds to manage business risk, rather than their clients’ investment risk.”
Monica Tepes, investment trust analyst at Cantor Fitzgerald, said: “Is this the best place they can invest their money?”
Meanwhile Jon Beckett, UK research lead for the Association of Professional Fund Investors, said: “Alliance Trust’s job is to manage their clients’ money as well as they can, and of course they shouldn’t hold persistently underperforming funds when better alternatives are available.”
On announcing a £6.6m loss by Alliance Trust Investments in 2012, the Alliance Trust board reassured its shareholders that the venture was well positioned to perform profitably in 2013.
But that year Alliance Trust Investments went on to lose £4.2m, followed by a further £3.2m loss last year.
An Alliance Trust spokesperson said: “The trust invests in a number of the ATI [Alliance Trust Investments] funds because it is important seed capital for these funds and we want to create scale in order to attract further external investment.
“Building these funds, of course, leads to growth at ATI for the overall benefit of Trust shareholders…
“At the same time, we have absolute belief in the management team... It makes sense to back the team that we employ to run trust funds.
“With this in mind we invested, for example, £100m in the Monthly Income Bond fund at launch and this has performed extremely well and has allowed the fund to grow its third-party FUM [funds under management] substantially. We also keep our investments in the ATI funds under close review and sell down positions as and when we believe it is appropriate.”
Investment Adviser says…
Investment Adviser has made no secret of its view investors should back the three nominees to join the board of Alliance Trust, a perennial poor performer with persistent share price discounts.
Alliance Trust has worked hard to disrupt the board appointments, claiming activist Elliott Advisors wants to appoint the trio in order to disrupt the trust for its own short-term ends.
But the claims smack of scaremongering and do not hold water. The three would be bound by UK governance rules if appointed, obliging them to only act in the best interests of the entire shareholder base.
They would not even carry a boardroom majority to enact formal changes.
The appointees would also provide some much-needed experience to, and scrutiny of, the Alliance Trust board, holding the executive to account.
One option might be for some or all of the portfolio’s investment management to be outsourced to a talented third-party fund manager – this is a standard model for almost all investment trusts in the UK.
The appointees might well also want to ask about the trust’s investments in underperforming funds from Alliance Trust Investments.
Or, the three nominees might well conclude that the current path is appropriate – as indeed it might well be.
Either way, Investment Adviser believes investors should vote in favour of resolutions 14, 15 and 16 at this week’s meeting.
