US hedge fund Elliott Associates last week declared that it had a holding of 10.06 per cent in the investment trust, split half and half between direct shares and a derivative positions.
The firm, a well-known activist investor, had previously declared a 3 per cent stake in 2011 and a 5 per cent stake in November 2012.
Investment trust experts have predicted that the increased stake could be a precursor to Elliott looking to put pressure on Alliance Trust’s management - including chief executive Katherine Garrett-Cox - to enact changes which would benefit shareholders.
The most likely outcome of any activism from Elliott, according to analysts, was that Alliance Trust would ramp up its share buyback programme, in which it buys back its own shares and then cancels them, which serves to reduce the trust’s share price discount closer to its net asset value.
The reduction in the discount will generate returns for existing investors in the investment trust.
Stephen Peters, head of investment trusts at Charles Stanley, said it was “good news” for investors that Elliott had increased its stake.
He said he expected the trust’s discount to narrow even before Alliance Trust puts in place any buyback policy because investors will start anticipating such a move.
And he said this will give a short term opportunity for investors to realise gains.
“That will hopefully give investors a reason to sell and buy a trust or trusts that are better managed,” he said.
“It will, if this happens, see investors focus on the key point of investment skill and ability, rather than on the trust’s discount. That’s the most positive thing that could come out of any changes.”
In a research note, Numis Securities said it expected the increased holding from Elliott would put “further pressure on Alliance Trust to improve its performance and narrow its discount”.
It said: “We would not be surprised if its buyback programme became more active once again.”
Elliott declined to comment on what its potential plans are for Alliance Trust, but it has previously supported another activist investor, Laxey Partners, in its efforts to first force Alliance Trust to implement a discount control mechanism and then to appoint external asset managers to run the fund.
Both motions were voted down by shareholders, but Mr Peters suggested that Elliott may succeed in mobilising support where Laxey failed because it has a bigger stake now than Laxey did and it is a much bigger organisation with more resources than Laxey.
Even though Laxey’s proposals were unsuccessful, Alliance Trust embarked on an extensive share buyback programme in 2011 and 2012.
However, Numis said the buyback scheme had dried up in 2013 and the trust now traded at a substantial 12.3 per cent discount to its net asset value.
Simon Elliott, investment trust analyst at Winterflood Securities, said he thought Elliott “could make an announcement ahead of Alliance Trust’s next annual general meeting scheduled for May”.
Alliance Trust has been a target for activist investors in recent years because its discount has been consistently wider than its investment trust peers, while it has also lagged in terms of performance.
The trust is in the third quartile of the AIC Global Growth sector in the past five years, delivering a return of 102.4 per cent compared to the average return of 118.7 per cent.
Alliance Trust declined to comment because it is in a so-called closed period ahead of its results later this week.
