Scot-Buzz Editor BILL JAMIESON wonders what referendums actually decide?

In Scotland we have good cause to ask. Barely did we think the independence issue was closed with an emphatic ‘No’ vote last September than it seems as wide open as ever.

An epochal surge in support for the SNP could well bring another independence referendum before long. Now there’s a similar effective referendum underway at one of Scotland’s biggest and most iconic institutions. Its future hangs in the balance with a critical vote scheduled for April 29. Misunderstanding and complacency could well see it slip through our fingers.

More than a century ago Scotland was the global leader in investment trusts. We pooled our savings and invested in a spread of ventures round the world – from American railroads through African goldfields to South American farms. An early leader was Dundee-based Alliance Trust. Founded in 1888, it is one of the oldest and largest investment trusts in the world. It has assets of £2.9 billion and a following of more than 50,000 small investors.

Now, for the third time in recent years, it is under siege.

Elliott Partners, a New Jersey based hedge fund, wants to put three of its nominees on the Alliance board.  The row is over performance, management costs and governance. Elliott says the trust charges are too high; that chief executive Katherine Garrett-Cox (pictured) and chairwoman Karin Forseke are paid too much, and that the trust is a serial under-performer.

Now it’s certainly true that Alliance’s performance has been lacklustre. Investment managers have come and gone. Its latest mantra on investing in “sustainable” companies is incoherent. Elliott argues that in five of the last six calendar years Alliance’s net asset value total return has fallen below the sector average and that, cumulatively, the shortfall is 7.7 per cent, or 1.3 per cent a year.

The share portfolio has returned less than 36 per cent over 2011-2014 versus a comparable world index of just over 41 per cent, a shortfall of 5.7 per cent. Its fund platform subsidiary Alliance Trust Savings continues to lose money despite successive assurances of a profit around the corner.

And shares in Alliance are standing at a yawning discount of 12 per cent to the value of the investments held in the portfolio.

Even Alliance’s house broker, JPMorgan Cazenove, has admitted that the trust’s critics had landed “a few heavy blows”.

So there is much for investors to feel dissatisfied about, on top of an uncompetitive dividend yield of just 1.4 per cent, markedly lower than the FT All Share average.

This is the most serious challenge yet to the governance of Alliance. Elliott has brought more firepower to bear by raising its voting stake in the trust from five per cent to 10 per cent. Through contracts for difference it holds a further 2.3 per cent. But does that merit a vote for the boarding party?

The showdown Alliance Trust annual meeting is scheduled for 11am at the Gardyne Theatre Dundee on Wednesday April 29. Little – very little – is known about what the three Elliott nominees – Anthony Brooke (ex-Warburg), Peter Chambers (ex-Legal & General Investment Management) and Rory Macnamara (ex-Morgan Grenfell) – intend to do.

No clarification has been given by any of them as to what reforms they would make. Alliance claims that the nominees are not independent from Elliott and that the aim is to realise a quick profit by engineering an exit from its shareholding.

At previous meetings with the Alliance board they have expressed interest in a tender offer for shares in Alliance – a device that could threaten the very existence of the trust. The Elliott track record is interesting. It has mounted attacks in several UK companies in the past including supermarket group Morrisons and National Express.

In the latter case Elliott was accused in the Financial Times of flouting corporate governance procedures throughout its campaign, acting like a “school bully” and appearing to be “an investor who wants to take the money and run.” Similarly, Elliott’s attack on Morrisons Supermarkets was described by The Times as “lousy” and “highly questionable”, questioning whether such activity was in the interests of the company in the long run. Aside from short term investments in public companies,

Alliance claims that Elliott’s affiliates also purchased the defaulted – or near defaulted – national debt of emerging economies such as Peru and the Republic of Congo, “often obstructing restructuring processes and using litigation to secure pay-outs.” So, resonant though the Elliott critique may be, it does not immediately follow that it is the solution to the Alliance problem.

And there is more to this than a calculus of opportunistic advantage. Alliance, for all its current difficulties, still represents a culture of long term investment and capital protection. It has appealed to tens of thousands of Scots investors through the generations for a judicious balance between capital growth and dividend income.

And it still has the ability to run a highly competitive investment operation with costs markedly lower than those encountered in London. Alliance has also long been a formidable constituent of Scotland’s financial services sector. We have lost too many as it is – Scottish Amicable (to the Prudential), Scottish Equitable to Aegon), Scottish Widows (to Lloyds Bank), the TSB (to Sabadell of Spain),Scottish Provident (to Royal London). Of the 15 biggest Scottish-registered companies accounting for 97 per cent of all UK sales generated by Scottish-registered companies, ten are now owned outwith Scotland.

A successful Elliott assault could open Alliance to further predatory attack and ultimately take-over. Shareholders surely deserve to hear, not only from the Elliott nominees, but also from the existing Alliance non-executive directors as their role is to provide a performance and governance watch on behalf of investors.

The NEDs are John Hylands, Alastair Kerr, Susan Noble and Gregor Stewart. Remaining silent when the trust faces such a direct challenge to its modus operandi is not an option.

Too many searching questions have been raised over a lengthy period of time for any return to status quo ante.

Investors should press for a demonstrable improvement in performance and the prospect of credible profits on trading subsidiaries for confidence in the board to be sustained. On that perspective, the future direction and stewardship of Alliance remains open to critical analysis and improvement.

But that does not make Elliott the solution.

There are even bigger questions here – and a real risk of self-annihilation. Shareholders should find other ways of effecting change – and vote ‘No’ to the “Elliott Amigos”.  

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