The hedge fund now owns 5 per cent of ordinary shares and CFDs [contracts for difference] over a further 5 per cent, for a total position of 10.02 per cent in Alliance Trust.
Monica Tepes (pictured), investment trust analyst at Cantor Fitzgerald, says that the likelihood is the hedge fund will push for significant changes to the running of the trust at the very least and is unlikely to be looking at the long-term.“They are activist investors: 10 per cent in Alliance Trust is £250m, so they have a lot of money in it, so the expectation is that they will be using it to press for some changes,” she said.
“I think it’s safe to assume they aren’t in it for the long-term and they aren’t holding Alliance Trust for the long-term NAV performance.”
Alliance Trust is, at £2.49bn, one of the largest investment trusts on the UK market and hugely popular with retail investors.
The trust has struggled for many years with performance and lags behind the IT Global Growth sector in share price and NAV terms over one, three and five years.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
This caused it to run into trouble with activist hedge funds in the past.
In 2011 Laxley Partners pushed for the board to hire external management and for an offer to buy back shares close to NAV [a tender offer].
However, the hedge fund failed in the face of resistance from the ordinary retail shareholders that make up so much of the shareholder register and Laxley sold out.
“Last time the problem was that Alliance Trust’s shareholder register was very granular. There are lots of smaller shareholders who don’t follow these things closely and lots of long-term investors who don’t want the tax obligation [from selling their shares],” Tepes said.
Analysts warn that Elliott is a more aggressive animal and the size of its stake – Laxley owned only 5 per cent in 2011 – suggests it will be wholly committed.
“It has deep pockets and we believe that this raises the prospect of hostile corporate action as it may not be easy to trade out of such a large stake,” said Ewan Lovett-Turner, analyst at Numis.
“Elliott is much larger and has more firepower,” Tepes said.
Elliott previously notified when its holdings reached 3 per cent and 4 per cent of shares, but was only required to notify its holdings in CFDs when the total interest rose to 10 per cent, meaning the latter was built up on the quiet.
It was one of the hedge funds that sued Argentina in international courts over its failure to pay back dollar-denominated high yield debt after the country defaulted in 2001.
The hedge funds won the case but Argentina refused to pay, at which point Elliott arranged the seizure of the Argentinian naval ship Libertad in Ghana, later ordered to be released by the UN Tribunal for the Law of the Sea.
The fund is also well known for forcing restructurings of large companies that it perceives to be underperforming or sales of assets.
Elliott was one of the most active investors in the investment companies sector a decade ago, according to Lovett-Turner, but withdrew due to tighter discounts following the widespread introduction of buybacks and a deterioration in trading liquidity.
Alliance Trust has made a number of changes to its operations over the past few years that have caused analysts to become more positive on its future.
In 2012 the trust appointed Ilario de Bon as head of equities with a mandate to make the portfolio more concentrated and run it along unconstrained global lines rather than as segmented regional portfolios.
The subsidiary businesses of Alliance Trust Savings and Alliance Trust Investments have been showing signs of steady improvement.
However, the trust’s performance has remained disappointing.
Over the past year its NAV is up just 6.9 per cent, well below average for the sector, and its share price returns of 7.78 per cent are below the 11.52 per cent sector average.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Tepes says that the position of Katherine Garrett-Cox could come into question again.
She has already survived moves by several shareholders to oust her.
“Their CEO has been in place for over five years,” she said.
“For me it’s all about performance. It’s such a shame if they try to fix the discount by buy-backs and tender offers when it should be about performance.”
The analyst adds that the hedge fund is likely to push for relatively quick returns on its money and it is hard to see what the effect would be on ordinary shareholders until the fund’s intentions are clear.
The fund will want to increase the value of its stake in some way, but if this is in the form of a tender offer whereby investors are offered the chance to exit their investment closer to NAV than the current 13.2 per cent discount then it will only benefit those investors who are willing to sell rather than hold for the longer term.
Alliance Trust is currently yielding 2.2 per cent and has ongoing charges of 0.68 per cent, according to the AIC.
It currently holds 6 per cent in fixed interest, an innovation introduced under the current management, and its top holdings are Pfizer, United Technologies and Walt Disney.
