Alliance Trust reshuffles board

As avowed sceptics of investment trusts in general, these sorts of shenanigans usually pass us by, but this time it is different. The Trust’s complex sprawling empire encompasses Alliance Trust Investments, which runs several socially responsible funds.

The relationship between the investment trust and the asset management firm is perverse. While it is usual for an asset management firm to run some investment trusts, in the case of Alliance it is the investment trust that runs the asset manager.

Alongside its more traditional portfolio of global equities, the firm has branched out to launch an asset management business Alliance Trust Investments and platform Alliance Trust Savings.

In a roundabout way it is this odd set-up – combining its investment vehicle and the corporate umbrella – that has been the cause of all the controversy. US hedge fund Elliot Partners, an investor in the trust, has been critical of the management, claiming that its diversification into empire building has increased costs and lowered returns to the detriment of investors.

While the trust may have been going off the rails, its subsidiary, Alliance Trust Investments, has performed adequately. It has a stable of 11 open-ended investment companies spanning mixed assets, UK equities, global equities, bonds and absolute return. Most of the funds are run with a focus on socially responsible investment – a strategy adopted in 2013 along with the SRI team from Aviva Investors.

Performance across the range is more or less respectable: 55 per cent of its funds with a three- year track record are top quartile or better, which is a reasonable achievement compared to other asset managers, with that number rising to 70 per cent over one year.

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The focus on ethical investing is usually a drag on performance, with lower returns accepted as the cost of a clean conscience. However, this has not been the case at Alliance Trust. Its ability to stick to an SRI mandate without sacrificing performance is the reason we selected two of the range for our FE Approved Fund List.

In particular, we have been impressed by Alliance Trust Sustainable Future Managed and Sustainable Future Absolute Growth funds.

Both funds take a multi-asset approach and combine a negative screen, which filters out companies investing in the usual no-go areas of arms, tobacco, gambling and pornography, with a more positive approach to identifying companies with more sustainable business practices than their peers.

This combination of positive and negative elements is the strategy used across Alliance Trust Investment’s sustainable future range, and their approach is unlikely to change. While the Trust’s management may have experienced a shakeup, Ms Garrett-Cox will remain in charge of the fund management group. So even though the parent firm is seeing some dramatic changes, it will hopefully be business as usual for the funds.

While we have been happy with the performance of the group’s fund range, there has been a long-running campaign against the trust’s board from investors who are unhappy with its direction. Given that the trust has been using a similar strategy to the Sustainable Future range of funds with its equity investments, it is worth considering if these criticisms have any merit.

The charge levelled by Elliot is that the Trust has been charging too much and performing too poorly. It has been especially critical of the board for failing to address these issues and just muddling along, and paying itself excessively was the final slap in the face for investors. The company’s board for their part have been trying to make the case that the trust stacks up well compared to its peers and benchmark.

It is not an easy case to make. Looking at the total return performance of the Trust’s share price versus its benchmark and sector, the best we can say is the results do not look too bad. Alliance Trust returned 39.1 per cent, whereas the Association of Investment Companies’ global sector made 36.24 per cent and the Trust’s benchmark, the MSCI All Country World index, made 33.79 per cent.

On this evidence, the figures for three years look distinctly average, which is not a great endorsement of management, but not something that usually triggers a shareholder result. As always, though, a single snapshot does not paint a very accurate picture, and this is doubly true for investment trusts where the performance of the stock does not always reflect the true performance of its investments.

One of the charges levelled at the trust is that they have skewed the figures in their favour by selecting favourable comparators and time periods, but it has still only managed to look average. When conducting a fairer analysis of performance, it actually seems pretty woeful.

Starting with the peer group, the AIC Global sector is a pretty broad church with more than a few companies that are not really suitable for comparison. Stripping away the fund-of-funds and smaller caps, Elliot came up with three other trusts of a similar size investing in similar things and used these as a baseline for what should have been expected.

Accepting share price is not a good indicator of competence though, so it is prudent to look at the performance of the underlying investments, such as net asst value, to determine how well the portfolio is being run. The share price has been trading at a significant discount to the NAV for some time, and the failure of these numbers to converge is a common warning sign that things are not going well.

The results are not flattering. Against the new peer group of Scottish Mortgage, Foreign & Colonial and Witan, Alliance Trust underperforms significantly. Again, though, the headline benchmark comparison might be misleading. The MSCI World Index is not greatly influenced by emerging markets and is a much better representation of the strategy pursued by Alliance Trust, which also focuses on developed world equities. When using this as a guide, results are also poor.

A superficial analysis also makes the Trust look reasonable on fees. The costs of funds in the sector range wildly and Alliance Trust looks to be down the cheaper end. But again when comparing it to its closest peers it seems uncompetitive. The fees for Alliance Trust are 14 basis points higher than Scottish Mortgage, with the former facing allegations that it has been less than transparent in declaring all of its costs.

Our position on Alliance Trust can be summed up quite succinctly. We like the funds, but dislike the investment trust. The whole affair has also reinforced this position more generally.

While the investment trust industry is not entirely made up of bad apples, the archaic structure lends itself to a lack of transparency and clarity that can add complexity and risk that is seldom well rewarded. It is worth remembering that Alliance Trust is supposed to be a retail investment: more than 60 per cent of investors are retail, and yet are expected to vote on a proposal by a US hedge fund to change the corporate governance structure.

Open-ended funds offer simplicity and clarity of purpose that makes it possible for the average investor to make a fair informed judgement on what they are investing in without having to consider the possibility that the fund manager might suddenly change tack and decide to open a leisure centre or pursue some other side project to the detriment of their day job.

There is a reason why open-ended funds have gained such prominence with investors, and Alliance Trust’s recent troubles have reminded us just what that is.

Rob Gleeson is head of research of FE Research

Key points

Alliance Trust has changed its management board. Chief executive Katherine Garrett-Cox will leave the post, but remain in charge of the fund management group.

The Trust’s funds perform well, but the structure has to change.

Alliance Trust Investments has performed adequately, and two of its funds made the FE Approved Fund List.

On the total return performance of the Trust’s share price versus its benchmark and sector, the best we can say is that the results do not look too bad.