David Prosser: Time for Alliance Trust to stop discounting the views of its shareholders

Outlook: The wider investment trust sector has some talented asset managers but suffers from under exposure because it is seen as old-fashioned
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The Independent Online

There was a time when the large global generalist investment trusts such as the £2.4bn Dundee-based Alliance were the go-to vehicles for investors who wanted broad-based exposure to international stock markets. But those days have long gone, with the investment trust sector eclipsed in the past two decades by open-ended vehicles such as unit trusts and Oeics.

In part, this reflects the fact that independent financial advisers used to earn commissions from recommending unit trusts, but were not able to do so from sales of stock market-listed investment trusts. But just as big a problem has been the structure of investment trusts – the closed-end format means their shares can trade at a premium or, more often, a discount to the value of their assets.

So it is with Alliance Trust, a FTSE 100 company whose shares have persistently traded at a price undervaluing its assets by 15 to 20 per cent or more. Since investors buy into Alliance as a bet on its ability to grow these assets, it's frustrating that its shares trade at such a sizeable discount.

Enter Laxey Partners. In what is a gentle initiative for an activist investor with a reputation forcombative campaigns against recalcitrant managements, Laxey yesterday launched a website to promote its push for reforms at Alliance: specifically the introduction of a "discount control mechanism" that the company automatically applies if its discount rises above 10 per cent. Primarily, that would be likely to mean a share buy-back programme.

Given how little Alliance has done to confront its discount, right is on Laxey's side in this argument. Yet it is unlikely to get its way. With just 1.3 per cent of the shares, the activist investor's influence is small compared to the Alliance savings scheme, which owns more than a fifth of the company and which Laxey says is effectively management-controlled.

That's a pity, both for Alliance itself and the wider investment trust sector, which has some talented asset managers but suffers from under exposure, partly because it seen as old-fashioned and inflexible.

On one score, Alliance qualifies as Britain's most reconstructed large company: in Katherine Garrett-Cox and Lesley Knox, it has the FTSE 100's only female chief executive and chairman team. A pity then, that they are not prepared to modernise the governance of Alliance.

Ms Garrett-Cox insists the key to getting the discount down lies in improving Alliance's investment performance. She may be right, but returns, at least until the past year, have been mediocre. Investors may face a long wait for this strategy to come off. In the meantime, the more formulaic approach, of an automatic discount mechanism, has been introduced at rival investment trusts and would benefit Alliance too.

It's the tax avoiders who make life complex

As Eric Cantona prepares for his day of action against the banks (he wants everyone to withdraw their money today in protest at the financial crisis), the former footballer can take some encouragement from the success of direct action in the UK. Within 48 hours of UKuncut forcing the closure of branches of retailers in the Arcadia empire of Sir Philip Green, in a protest over tax avoidance, the Treasury yesterday unveiled a crackdown on tax loopholes.

No doubt the Treasury's new rules were planned months before UKuncut began its protests against companies it claims have been particularly blatant tax avoiders. (Cadbury might be good target for the next round of demonstrations, given the revelation that its new parent, Kraft, plans to reorganise the UK company's structure for tax reasons.)

But it must slowly be dawning on the corporate sector that when spending is being lopped, benefits cut and taxes raised, the impression it gives of doing its level best to minimise its tax bill, even at companies that are very profitable, is going to make it a target.

Yesterday's Treasury announcement was met with complaints from the likes of the CBI about introducing uncertainty and complexity to the tax system. But if the CBI's members did not spend so much time dreaming up new ways – all perfectly legal – to pay less tax, anti-avoidance legislation of this sort would not be necessary.



Not such a licence to print money after all

De La Rue is right to describe the bid approach of France's Oberthur as "opportunistic". Prior to July, when the banknote printer's woes first became public, its stock has traded comfortably above the 905p indicative offer price for much of the previous three years. This tilt is an attempt to pick the business up while it is going cheap.

That is not to say, however, that De La Rue is right to have rejected Oberthur so hastily. After a terrible six months, this is not the same company as the one whose share price touched £10.20 earlier this year. The decision of some staff to deliberately use inferior paper for certain contracts has prompted a profits warning and cost De La Rue its chief executive (a replacement has been identified but not secured). Worse, it may yet result in the loss of its most important client, the Reserve Bank of India, which accounts for as much as a quarter of sales.

If the Indian central bank does decide to jump ship, it may be some time before De La Rue shares test 905p again. And while the chief executive has gone, how confident can shareholders be in the management of the company, most of whom remain in post?

The temptation for De La Rue, which counts the Bank of England as a customer, will now be to wrap itself in the flag – a French company making pound notes, anyone? But if the French go hostile, De La Rue is going to have a fight on its hands to prove it deserves support, nationalistic or otherwise.

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