Alliance Trust bosses unnerved after activist hedge fund Elliott Advisors calls for a board shake-up

 
Tim Wallace
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Katherine Garrett-Cox

A bitter row is erupting between FTSE 100 investment group Alliance Trust and its biggest shareholder, the activist hedge fund Elliott Advisors.

Elliott is today pushing to add three new non-executives to the board of Alliance, in a move that will pile the pressure on the firm’s chief executive Katherine Garrett-Cox.

“They’re not calling for her head, but objectively she has been there for a very long time and has overseen the underperformance,” said a source close to Elliott Advisors.

The activist argues the trust has underperformed its peers, as its shares trade at a discount to its net asset value of around 14 per cent. By contrast, rival F&C trades at a seven per cent discount.

As a solution, Elliott wants to add three as yet unnamed directors. The hedge fund found the investment veterans through a headhunter, believed to be Spencer Stuart, and hopes their presence on the board will improve governance and sharpen bosses’ focus on returns.

If shareholders back the move, the three could be appointed at the annual general meeting next month. The board has yet to see who they are, and so cannot pass judgement on whether or not to back to plan.

The signs so far are not positive, as relations have already deteriorated sharply. Alliance Trust says the performance of the firm is improving, boosting its valuation – its share price hit a record high earlier this year.

As a major investor, Elliott has met management dozens of times to discuss the firm’s performance and goals, but this has not resulted in any shared viewpoint.

“If Elliott was genuinely serious, they would have raised these names at their meetings last week with the chief executive and chairman. It seems very underhand to come out with this three or four days later,” said an Alliance Trust source.

The insider argues Elliott’s choice of non-executive cannot be as independent as the hedge fund claims, because Elliott picked the headhunter and set out the criteria for their selection. And the source predicts the wider investor base – largely long-term, retail shareholders – may well reject the move: “The short-term time horizons of a vulture fund like Elliott don’t sit well with the views of a long-term shareholder base, which is focused on dividends and steady performance.”

“These guys have no interest in the longevity of UK companies,” said another source. Elliott has held Alliance stock for four years, but that pales in comparison with some small shareholders – Alliance likes to boast that many investors inherited their stock from their parents and grandparents, and see the firm, which has a market capitalisation of more than £2.7bn, as a permanent income-generating stock.

The trust has increased its dividend in each of the last 48 years, so objects to the claim its returns are poor. The investment trust sector is traditionally relatively genteel, while hedge funds tend to have developed a secretive air, making this public eruption highly unusual.

Garrett-Cox has successfully fought off previous challenges – in 2012 Aberdeen Asset Management launched an offensive and Laxey Partners tried to force a change of investment managers. Yet Laxey’s stake in Alliance Trust at the time was just 1.7 per cent. Elliott has built a position amounting to 12 per cent of the firm.

“We note recent media speculation but to date we have not received a proposal or requisition from any of our shareholders. If and when we do so, we will inform the market in the appropriate way,” said Alliance Trust.

“We remain entirely focused on running the business, delivering investment performance and acting in the best interests of all of our shareholders with a focus on the long-term.” Elliott Advisors declined to comment.

ELLIOTT’S HIGH PROFILE ACTIVIST BATTLES

Elliott upped its stake in Prezzo to over 14 per cent earlier this year in a bid to push through a higher takeover offer from TPG. The Italian restaurant chain accepted an offer from the private equity firm in November, yet this was seen by some to undervalue the company.

Elliott Management, via its NML Capital unit, has been in a protracted battle with the Republic of Argentina over bonds the country defaulted on during its last big financial crisis in 2001.

Elliott Advisors spent the spring of 2011 attempting to overthrow the board of National Express as well as pushing for a sale or a break-up to boost its earnings. It eventually sold its stake of nearly 20 per cent in 2013.

Elliott built up a stake in Morrisons last year in order to push through a radical overhaul of its property portfolio to boost returns, allegedly calling for its freehold estate to be placed into a separate firm.

Elliott Advisors rescued Game Digital from bankruptcy two years ago in a buyout fronted by Henry Jackson’s turnaround firm Opcapita. It still owns a stake of around 48 per cent.

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