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Brian Tora: Investment trust investors benefit from narrowing of discounts

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Well, it rather looks as though I might be waiting a little while for that new high for the FTSE 100 Share index.

Markets have done little more than drift over the past week or so. From flirting with 6,800 on the way up, they nudged 6,600 on the way down. Heaven knows where the market has got to by the time you read this but I have been surprised by the downbeat vibes I have been receiving from investment managers I have come
across recently.

Perhaps those technical analysts that have been predicting a pull back to 6,000 are beginning to have their voices heard. Actually, that is only a drop of a little over 10 per cent but it could be enough to frighten away the bulls.

Even sterling has been producing a lacklustre performance although, given the state of the eurozone, this feels even more surprising. At least the weather has taken a turn for the better. On a number of fronts, May feels as though it has arrived early this year.

On a more upbeat front, last week had something of an investment trust feel to it for me. As well as the Association of Investment Companies holding its annual directors’ conference (not that I went as I no longer sit on any investment trust boards), I was able to meet with Alliance Trust’s chief executive Katherine Garret-Cox and the curiously named Ilario Di Bon, its head of equities. A lot has been happening in this large generalist trust over recent years, not the least being the acquisition of a significant stake by US hedge fund manager Elliott Associates.

This is not the first time Alliance appears to have been stalked by an activist investor but it does at least seem to have helped the level of discount applied to the shares, which has halved to under 10 per cent. Actually, the fall in discount levels in general was commented on at length in the AIC’s conference – both in positive and negative terms.

The question posed was whether this represented a structural shift or was merely a cyclical rerating which could be reversed at any time.

On the plus front, the fall in discounts has delivered a better share price performance than would otherwise have been achieved. However, one analyst warned that present conditions should only be taken as an opportunity to issue more shares if proper discount controls are in place to deal with any change in sentiment. Perhaps Elliott Associates’ purchase demonstrates fortunate timing, in which case one cannot but wonder how long they intend to remain on the share register.

Alliance Trust is different to other international generalist trusts in that it has subsidiary businesses which operate in the investment arena.

Alliance Trust Savings is a direct to consumer platform while Alliance Trust Investments is a conventional open-ended fund manager. Together, these two businesses look after over £8bn of assets – rather more than the trust itself, which has a portfolio of just over £3bn.

The problem is that neither of these two makes much, if anything, in the way of profit for the trust and they are considered by some to be a distraction although this is not the view of Garrett-Cox. Indeed, it is possible to argue that these resources add in some measure to the investment skills available to deploy towards managing the core portfolio. More important is how this portfolio performs.

A big shake-up instituted around 18 months ago has significantly reduced the number of holdings and allowed a high conviction, bottom-up approach to be adopted. The trust also employs an interesting thematic overlay to ensure a degree of top-down discipline is maintained. So far the results are encouraging although their significant hedge fund holder remains the elephant in the room. Still, at least they believe equities are good value.

Brian Tora is an associate with investment managers JM Finn & Co

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