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Investment Column: Alliance is not so great for missing rally


Our view: Sell

Share price: 309. p (+0.5p)

Alliance Trust's chief executive, Katherine Garrett-Cox, has been saddled with one of those media nicknames that can so easily become a millstone. And that is exactly what "Katherine the Great" has become, given that the performance of Alliance Trust, the gigantic investment trust that she runs, has been anything but.

It was hard to find much to be positive about from yesterday's interim results. The trust was in the bottom quartile of its sector (Global Growth and Global Growth and Income Investment Trusts), having missed out on the stock market's summer rally.

Alliance says that it believes that "in some cases" there has been no fundamental change to the companies whose share prices have soared as a result of the rally. Its argument is that the increase in prices is not "necessarily reflective of any improvement in their underlying value". In other words, the market has got it wrong. That's a brave call for a company like Alliance to make, because if the companies behind the rally – financials, miners, cyclical stocks – retain their value and build on recent gains, Alliance will look rather silly.

Focusing on well-managed companies with healthy balance sheets and good cash flow is a great idea. But you have to pick the right ones as an active manager, otherwise your investors may as well invest in trackers. And tracking the FTSE All World index would have yielded a far better return than Alliance over the past six months. The Trust looks better over the year, but the 15 per cent discount to net asset value in the shares tells its own story. Of course, there is always a prospect of corporate action that could narrow this, but big generalist trusts tend to be difficult to shake up.

Alliance's long-term strategy looks sensible enough, the US and the UK are being focused on for income while Asia is there for growth, but it is not currently producing results, and the discount looms large. Great it may be in the future, but for the present, sell.


Our view: Hold

Share price: 34.65p (-0.35p)

Morse's woeful performance on the market over the past 18 months is hardly a mystery worthy of the eponymous television detective. The IT company has been battered by the onset of the downturn and falling demand. The stock was at 37.75p when this column last ran the slide rule over it a year ago. We said sell, and it subsequently plumbed the depths to about 4p, before climbing back up again.

Some felt Morse – which resells technology from companies including HP and IBM, as well as providing maintenance and support and business applications – had overstretched. However, it has since been streamlined, and the rocky finances are stabilised.

Morse has overhauled its board, bringing in chairman Kevin Loosemore and chief executive Mike Phillips to start the firefighting and turn the company around. The management also launched a restructuring plan which is now largely completed, and are looking towards growth in 2010.

Morse's annual results earlier this month showed a "very challenging" first nine months, according to Investec, but profits did rise in the fourth quarter. However, whether the server support and maintenance market – its biggest business – will return enough to make it worth a punt is debatable, especially as no dividend is expected until 2012.

Panmure has Morse on a price-to-earnings ratio of 6.6 times forecast full-year earnings, which doesn't look too demanding. But despite the positive end to the year – traditionally the group's strongest quarter – the upside isn't clear enough to pile in yet. The shares aren't likely to sink much either, though, so we feel that we can upgrade our view to a hold.

Allergy Therapeutics

Our view: Buy

Share price: 18.54p (+1.29p)

Despite green shoots now forming part of the everyday lexicon for small-cap biotechnology companies, equity funding is still hard to come by. That is why investors should pay special attention to Allergy Therapeutics, the Aim-listed vaccines group.

The company got a big vote of confidence from the markets, was able to cut much of its debt and restructure its balance sheet after raising £22m in a rights issue earlier this year. Yesterday's preliminary results were also encouraging: research and development spend has fallen from £16.3m to £5.3m after two trials came to an end, leading to a 20 per cent hike in gross profits and a reduced operating loss.

Investors in the biotech industry need share prices to rise (you've more chance of winning the lottery than getting a dividend), and those that bought these shares a year ago have seen their investment jump by 27.8 per cent.

The stock reflects the flow of good news, and while we remain bullish, we caution that the gains made over the last 12 months may not be quite as impressive going forward. Sill, buy.