Secrets Of Success: A canny lot, those Scottish investors

Being in Edinburgh this week proved a happy choice, as the main talking point was the proposed merger between the two Alliance trusts of Dundee - and there's nothing investment traditionalists north of the border like better than dissecting the merits of the latest investment trust news.

Down South, investment trusts may be seen as poor relations in the fund world, but diehard value-investors, among whom I am happy to count myself, have long known that a really good investment trust is the ideal building-block for a long-term portfolio - just as an indifferent investment trust (of which there have always been a good number) tends to leave you disappointed.

There is no question that the Alliance Trust merger (if it goes through, as it looks likely to), is big news in the investment trust world. Combining these two longstanding trusts will create a company with an asset base of some £2.7bn. This will catapult it above Foreign & Colonial, the even older global generalist trust, with which the Alliance trusts have long competed in investors' eyes. Only 3i will have a larger market capitalisation among investment trusts.

Whereas F&C can date its origins to 1868, the two Alliance trusts were originally established in the 1880s, to provide overseas investment opportunities for wealthy Scottish investors of the day (nothing modern about emerging markets as an asset class).

The original Alliance Trust lent money to growing businesses, mainly in the Pacific North-west of the US, while Second Alliance, which followed five years later, was set up to grow a mortgage business based in Hawaii (hence its first name, the Western and Hawaiian Investment Company).

The two have been twins since 1918, when the companies decided to operate out of the same offices, sharing management and administration costs (an early example of the parsimony with which Dundonians like to manage their money).

While their portfolios differed for many years, in the last decade they have gradually been harmonised, to the point that they are more or less identical (mortgages have long since given way to global equities as the mainstay of the portfolio). The shareholder lists are now in fact the only real difference of any consequence between the two trusts.

Given this, the decision to merge would seem to pass the bleedin' obvious test, to the extent that most people wonder why it has taken 88 years - combining two portfolios run by the same management team, with the same board of directors, investing in exactly the same securities, is something of a no-brainer. The boards estimate the merger will save £250,000 a year in shared costs.

So, end of story? Not quite. Canny investment trust followers, of whom Edinburgh boasts many, have not got where they are without learning to pore over small print. The unanimous view I heard was that the fees the two trusts will incur in completing the merger look shockingly high at £4.5m. According to Alan Harden, the American chief executive who's gradually been changing the way things are done at Alliance since taking the helm in Dundee two years ago, the fees are insignificant - just 0.16 per cent of the trusts' combined assets.

To an investment banker, fees on this scale are indeed trivial, but such casual talk about pounds and pence is anathema to the hardened investment hands I talked to in Edinburgh ("scandalous", said one rival trust manager). Why, wondered another, given that the trusts are virtually identical, do both have to hire an expensive investment bank to give separate advice to an identical board of directors on a no-brainer deal? There seems no question of the directors voting to cut their fees to reflect the halving of the number of meetings they will have to attend.

You could argue that the costs of the proposed merger, however nonsensical, have been more than compensated for already by the rise in the two trusts' share price since the deal was announced. The merger should also remove any lingering doubts about whether the board and chairman can technically be regarded as independent, as required by the London Stock Exchange's Listing Particulars (another arcane issue on which my ear was much bent).

Unsurprisingly, for those who know their Scottish investors, the biggest beef was that the boards were too mean to offer shareholders in the smaller Second Alliance Trust a cash alternative to the merger terms.

As the shares in both trusts have traditionally traded at an above-average discount to asset value, reflecting their unspectacular performance, a cash alternative would allow those who wanted to do so to exit at a better price. (And lightening up on what is largely an equity portfolio might be prudent.)

For the Alliance trusts, allowing shareholders to exit for cash would have the unfortunate effect of raising their ultra-low total expense ratio (currently about 0.34 per cent per annum, the lowest in the sector) to a new higher level. As low cost has always been one of the Alliance's main selling points (and a highly laudable one too), this doubtless looks unattractive to the board, as would shrinking the size of the trust. It may also help explain why the Alliance directors have (until now) steadfastly refused to contemplate using share buybacks to reduce the trusts' discounts, as many other investment trusts have been forced to do.

I have long been a fan of the Alliance trusts, precisely because of their parsimony, so will be watching this with great interest. The message that such a venerable beast is changing is not necessarily for the worse, as traditionalists fear. The question being privately mouthed by my Edinburgh friends is whether the board's meanness regarding a cash alternative will now prompt some hard-nosed arbitrageur to come in and force the board to introduce buybacks and a cash alternative, at least for the Second Alliance Trust, the junior partner in this deal. It seems fanciful, but hopes of a quick windfall are what Edinburgh money-men of my acquaintance dream about at night.

jd@intelligent-investor.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
Barn owls are among species that could be affected
charity appeal
News
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Sport
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas