Alliance Trust to Buy Out Elliot, Pushing Up Fee

Activist shareholder Elliot is exiting its majority position in Alliance Trust - but the share buyback will mean higher fees for investors

Emma Wall 31 January, 2017 | 2:02PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Analyst, David Holder.

Hi, Dave.

David Holder: Hello, Emma.

Wall: So, we're here for an update on Alliance Trust (ATST). A lot going on at the closed-end fund over the last 12 months. The most recent news being that majority shareholder Elliott is exiting from the Trust. Now, Elliott have been activists in their role within the Trust. Perhaps you can explain a little bit more about who they are and the role they've played in the history of Alliance Trust.

Holder: Well, indeed, they've been on the share register for some years now and really what their agenda has been is to instigate some change, change of strategies, change of personnel within the company so to realize value. They've not done this for charitable reasons. They've done this because they are seeking profit. However, the changes that they have pushed for could well be in the benefit of existing shareholders.

Wall: And we've seen the strategy change as you say. We've seen senior management change. We've seen fund managers change. And now, this latest change will result in share buybacks. It will mean that Alliance Trust have to buy back the 19% of the Trust that Elliott owns. What does that really mean for investors? What does that mean for the fees, for the discount?

Holder: Well, recently on the 27th of January the Board have announced that they have reached an agreement with Elliott to buy back shares in the market with the intention that they buy back Elliott's entire holding. Elliott are the largest shareholder. And what they will do is they will buy back shares at a discount to net asset value of 4.75%. And obviously, that's a figure that Elliott seem to be in agreement with.

What the ramifications of that is that the fund will shrink in size. Since the strategic review on the 15th of December the Board have been very active in buying back shares. They've bought back some 32 million shares over 6% of the outstanding share capital and that has really dragged the discounting aggressively.

And so, very recently the discount on the Trust is 4.8% and it's varied over the past 12 months from 14% down to 4.5%. So, you can see the effect that this aggressive share buyback policy has had upon the rating of the Trust. And now, indeed, the Trust trades within the Morningstar peer group average as well which is pretty impressive from what we've seen historically.

The ramifications of this buyback is that the fund has shrunk in size, which is not something that we tend to like to see because it reduces liquidity and it also increases the fees. And so, the fees that Willis Towers Watson were looking to manage the Trust's assets was normally around 0.6%, which was fairly good value we believe and going forward, it's likely to be up to 0.65%, so a marginal increase in the fees that investors are likely to be paying here going forward.

Wall: Obviously, all of this is pending shareholder approval. And this is not the only thing that the shareholders of Alliance Trust will be voting on in the coming weeks, is it? It's both this buyback policy and indeed, a new strategy for the Trust in terms of the underlying holdings?

Holder: Indeed. Alliance Trust PLC have been running a number of shareholder meetings and forums where investors have been able to quiz the Board and also the proposed investment Willis Towers Watson about the way that they intend to manage the Trust's assets. And I've been attending a couple of these forums and it's very interesting hearing as well. So, yes, on the 28th of February there will be a vote and that will be pursuant upon getting shareholder approval for the change of strategy and also for the very large scale of the buyback which will facilitate Elliott leaving the share register.

Wall: And I suppose that's Elliott's legacy, isn't it, this change of strategy, because it will be considerably different to the way that Alliance Trust has been running in the past?

Holder: Absolutely. They've been I thought in the side of the company and the Board since they've arrived on the share register. And I think that whilst the legacy may take some years to unfold, I think that the change of strategy has a good chance of succeeding for shareholders which ultimately is what the Trust should be doing. It should be helping shareholders increase the value of their holdings over time and I think it's likely to have that effect.

Wall: David, thank you very much.

Holder: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar