David Prosser: Alliance's relegation will strengthen theresolve of its critics

Click to follow
The Independent Online

Outlook Some bad news for those who want to see more women running Britain's biggest businesses: the meagre number of female chief executives at the top of FTSE 100-listed companies will shrink by one today.

Alliance Trust, the Dundee-based investment business where Katherine Garrett-Cox is the chief executive (the company is also chaired by a woman, Lesley Knox, for that matter), is due to drop out of the blue-chip index at the reclassification that will take place at the close of trading.

Aside from the issue of women on the board, Alliance's demotion from the blue-chip index will offer additional ammunition to its critics, including Laxey Partners, the activist investor that holds a stake in the investment trust.

Laxey's complaint is that Alliance has not done enough to combat the discount at which its shares trade compared with thevalue of its assets, currently around 17 per cent. The danger is that this discount will now widen further as index-tracking funds that follow the Footsie automatically sell their Alliance holdings.

Laxey wants to see Alliance implement a discount control mechanism, as around half the investment trusts in its immediate peer group have already done. This would require the trust to automatically take steps to try to bring its discount down should it hit a specific level – 10 per cent, say. Share buybacks are the most obvious way to achieve that goal.

One can see Laxey's point. Although it is an investor with short-term horizons rather than one with the long-term interests of Alliance at heart – if the discount narrows sharply, it makes money without having to rely on underlying investment performance – a share price that undervalues the holdings of a company by almost one-fifth is an issue that needs to be addressed.

Alliance's objection to an automatic mechanism of this type is that it could inhibit investment flexibility. Any investment decision it is forced to make for reasons that are not related to market fundamentals – particularly if it is forced to sell assets to raise finance for a buyback programme – could jeopardise its performance.

The trust also points out that Ms Garrett-Cox is a relatively new appointment at Alliance who needs to be given time to overhaul its investment processes and restore its performance (and she has already begun to conduct ad hoc buybacks).

That may be true in the context of Alliance Trust's 120-year history, but Ms Garrett-Cox is now in her fourth year at the business (she joined in 2007 as chief investment officer). The discount slide likely to occur in the next few weeks will rightly be blamed on a tracker fund sell-off, but Alliance's investors have been patient long enough. If the discount doesn't start coming down soon, Laxey's case will become compelling.