Archives for May 2015

Board games

This article was first published in FT Adviser

In general the life of a non-executive director on the board of an investment trust is fairly straightforward, anonymous and lacking in controversy. For a few though, and for the directors of Alliance Trust over the last five years in particular, it becomes much more time-consuming, controversial and very much in the public eye.

Over the last decade, investment performance at Alliance Trust—a long-established, large and self-managed investment trust—has been disappointing, with shares tending to trade at a sizeable and relatively large discount to NAV. In late 2010, Laxey Partners, a US activist investor took a stake in Alliance Trust and campaigned for a large share buyback as a means of narrowing the discount. The Alliance Trust board opposed this and with Laxey only controlling 1.3% of the votes, a large majority of the shareholders backed the board who promised only to make use of a “flexible” share buyback programme. A key part of the board’s arguments against Laxey was the contrast between the short-term return perspective of the activist investor and the long-term return perspective of the management team and the many individual shareholders.

In April 2012, Alliance Trust gained a new Chairman, Karin Forseke, and together with CEO, Katharine Garrett-Cox, she immediately undertook a strategic review of the Trust’s activities, resulting in a seven-year plan to take the trust up to 2020.

For an investment trust with a very long history, the seven-year plan had much that was radical about it. The investment philosophy and process were transformed to focus on sustainable investments – favouring companies seeking to build responsible and sustainable businesses for the long term, consistent—it was felt—with the long-term perspective and expectations of the individuals of the Alliance Trust shareholder base.

In addition, and unusually for a self-managed investment trust, the strategic review identified two areas where a new business line could be developed that would build on the expertise already within the company. The first of these was to seek to build a third-party asset management business, Alliance Trust Investments, based on the sustainability approach that forms the basis for investing the Trust’s own assets – this was an area that was both ripe for growth in demand and where Alliance felt there were relatively few focussed competitors.

The second area was a savings platform, Alliance Trust Savings, where they saw an opportunity for growth in the wake of the UK Retail Distribution Review for a flat-fee pricing structure to take substantial market share, building on the operational infrastructure originally put in place for small shareholders in the Trust to reinvest dividends and buy shares through a regular savings mechanism.

To date the Trust has invested about £90m of shareholders assets (around 3%) in these ventures and ATI’s external assets and ATS’ assets under administration have grown in line with the intermediate targets set for them in the seven-year plan. In addition, the investment management process has been restructured to deliver the greater focus on sustainability.

However, there has not yet been a noticeable improvement in relative performance and as time passed following the Laxey Partners saga, it has appeared that the board has been less interested in pursuing the “flexible” share buyback policy. The discount to NAV has remained consistently higher than most of their competitors in the global growth investment trust sector.

In 2014, Elliott Advisers, another hard-nosed US activist investor built a 12% stake in Alliance Trust. In their meetings with Karin Forseke, they argued for the ATI and ATS investments to be discontinued and, like Laxey, for a substantial share buyback to reduce the level of the discount to NAV at which the shares traded.

The Alliance Trust board considered the Elliott proposals and concluded that though they might be in the short-term interests of Elliott, they would not be in the long-term interests of the shareholders as a whole. They thus rejected them and decided to continue with their seven-year plan.

In March this year, Elliott put forward proposals, to be voted on at the AGM in April, for three new directors to be added to the board. These three had, they said, been selected by Spencer Stuart, rather than by Elliott, and could be seen to be strong and independent figures from the financial world.

Alliance Trust shareholders became the focal point of campaigns from Elliott to vote for these new directors and from the board who were strongly opposed to the proposals, seeing them as a hostile move aimed at disrupting the company. As the date for the vote got nearer, a number of important shareholders and advisors came out publicly to say that they would vote against the board’s recommendation and for the new directors.

Following meetings with many shareholders it became clear to the board that the vote would be very close and it decided to seek a compromise deal with Elliott. This compromise saw the board agree to two of the three new directors put forward by Elliott, with the board seeking a third candidate after further consultation with shareholders, in return for an agreement that Elliott would not make any further public action or comments against the board until after the 2016 AGM.

The newly-enhanced board at Alliance Trust has a year to decide how best to balance the differing short- and long-term interests of their shareholders. The fact that the board had to accept the bulk of Elliott’s demands would appear to suggest that shareholders are losing patience with the very long-term approach adopted by the company. Over the next year, the directors will be giving considerable time to the issues facing the trust from its shareholders, with Elliott in particular putting them under pressure to boost returns for all shareholders.

4 lessons for Investment Trusts post Patient Capital

This article was first published in Investment Week

The news that Neil Woodford’s new vehicle, Woodford Patient Capital Trust plc, has raised more money at launch (£800m) than any other UK closed-end investment company in history provides an opportunity for the industry to re-establish itself in the eyes of many investors as a suitable repository for their savings. In order to achieve this, however some lessons must be learned.

Lesson One: Investors will buy closed-end funds when the structure adds value to their portfolio and is the appropriate one for the underlying investments.

The illiquidity of the fund through the unquoted nature of the majority of the fund’s expected portfolio meant that an open-ended vehicle could not be countenanced. The private equity investment trust, which Patient Capital is closest to in nature, has a well-established history and pedigree in the UK market and though the share prices of these vehicles have proved to be volatile in the short term, the fact that they provide long term fixed capital to managers has enabled many to deliver excellent long term performance. Only those investors who lose patience and sell their shares at discounted prices in difficult market conditions stand to miss out on the longer term performance.

In recent times investment companies investing in other specialist less liquid asset classes such as very small listed companies, property and loans, have also taken advantage of the closed-end structure.


Lesson Two: Investors will buy closed-end funds when there is a strong and trusted brand.

Woodford is an eponymous brand that has very strong recognition amongst private investors, and most importantly, a high degree of trust. There are few in the UK fund management industry who have made so much money over such a long time period for so many investors.

Recent media stories of pay in the asset management industry now outstripping pay in investment banking, combined with the rise of the passive investment industry attacking the performance of active managers, have been damaging to the image of the industry, as have the Financial Times’ surveys showing that sexism is rife within asset management companies.


Lesson Three: Investors will buy closed-end funds when the fees are attractively constructed.

Woodford has hurled a huge stone into a large pond that was already experiencing some ripples. There is no ongoing asset management fee at all (though there is an ongoing expenses charge capped at 35 bp). The manager will be remunerated exclusively through a performance fee of 15% of any performance above a hurdle rate of 10% per annum – 80% of this fee will be paid in shares priced at the prevailing NAV. These are terms that treat the underlying investor well compared with many other private equity vehicles.

It is clear that Woodford’s interests are well aligned with his investors. In today’s world of disappearing bond yields, zero fees before a 10% return is achieved, is very attractive to a retail investor. Morningstar’s position on performance fees is that, where they are appropriate at all, they should be tied to lower than normal fixed fees so that the manager has some hunger to achieve the performance necessary to earn a performance fee. Performance fees are most appropriate where returns are skewed towards alpha rather than market beta.

Investment company fees were already under pressure from the increasing prevalence of platform and super-institutional or super-clean share classes amongst open-ended funds. Both existing investment companies and future new launches need to look hard at their fee structures to ensure they are appropriate for this new environment. Woodford’s attractive fee structure has undoubtedly contributed to its successful launch.


Lesson Four: Investors will buy closed-end funds when there is a credible Board with the appropriate skillsets.

Patient Capital has four Directors, all non-executive and all with substantial experience of managing or investing in early stage innovative businesses in healthcare and technology. These are highly relevant skillsets for overseeing the type of portfolio that Woodford is seeking to build with the £800m raised at launch. From the biographies in the Prospectus, none of the Directors have, however, had any previous experience on the Board of a listed investment company nor do any of them appear to be a qualified lawyer, both of which are unusual.

An ideal Board has the asset class or sector experience to quiz the manager stringently, an accountant for the Audit committee, Board experience of other investment companies, and legal experience should controversies arise.