Although a share buy-back programme is in place, Dalton does not believe equity prices will react positively, causing the investment trust to shrink in size.
Alliance Trust has bought back some £50m of shares this year to date, enhancing NAV performance by around 1 per cent. The current 15 per cent discount to NAV remains wider than the AIC Global Growth sector average of 9.4 per cent.
"We see Alliance’s discount going nowhere so long as performance continues to remain broadly average relative to its peers and the indices," said Dalton. "We would expect the trust to continue shrinking through share buy-backs, and for the discount to remain where it is."
"We expect board and management to continue to rule out a target discount of 8 per cent. So long as the so-called activist-investors do not increase their stakes, there seems little likelihood of market expectations of discount narrowing rising."
Dalton thinks Alliance is unlikely to see a turnaround in performance, and for this reason has downgraded its view on the trust from positive to negative. He points to Bruce Stout’s Murray International Trust as a much better alternative.
The £926m investment trust, which holds British American Tobacco and Telus Corp among its biggest stakes, is one of the best performing in its Global Growth & Income sector over three- and five-year periods.
Performance of trusts over 5-yrs
Source: FE Analytics
Over three and five years Murray International Trust is up 35 per cent and 73 per cent respectively, compared with 19 per cent and 9 per cent from Alliance Trust.
The investment trust has constantly traded on a premium since 2008 and regularly issues stock at about 3.5 per cent premium to NAV.
Dalton concluded: "We recommend that investors bite the bullet and switch out of Alliance Trust on a 15 per cent discount into Murray International for a yield-uplift – a simple but clearly effective strategy, and for the prospect of a superior long-term total return."