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Closed encounters

Last week had something of a closed-end fund feel to it. Alliance Trust announced its results and the senior management team embarked on a tour of shareholders to try to garner support for voting at the annual general meeting. This is a big trust but one with a chequered history.

It fell out of the FTSE 100 earlier this year, even though performance had been improving. But it is the presence of so-called activist shareholders on the register that is exercising the board.

Two and a half years ago, Katherine Garrett-Cox stepped up from the role of chief investment officer to become chief executive. She had a number of problems to deal with. Asset performance had not sparkled and the discount had been widening. More controversially, the trust had used its considerable financial muscle to establish a securities administration business that was losing money. It still is.

Investment trusts venturing into business areas outside running a portfolio is hardly new. Several even started life that way. But Alliance Trust Savings had expanded the workforce and the cost base of the trust without so far delivering any benefits. It did, however, provide a convenient block of shares to vote on behalf of the board, something Ms Garrett-Cox has acted to remove as an irritant to the new and probably short-term shareholders.

I attended one of the management team’s presentations to shareholders. My family has invested in the trust for many years and I have taken an interest in its fortunes since learning that the grandfather of one of my clients had been involved in the setting up of the trust. Persuading my client she had too many eggs in one basket was so difficult that in the end I gave in and joined her on the share register.

Regardless of the merits or otherwise of the extra-curr-icular activities entered into by the board, something that became clear is that investor apathy means activist share-holders, whose time horizon may well be short, can exercise undue influence on the board. The trust board is urging shareholders to vote against the motions put forward by their new shareholders. It remains to be seen how many will exercise their rights.

This serves to emphasise one difference between open and closed-ended funds. The closed-end variety has a board of directors whose principal objective is to ensure shareholder interests are properly looked after. Some make a better fist of it than others but it is not unknown for a board to replace under-performing managers. And shareholders have more of a voice as a consequence. Unitholder rights exist but are not as transparent.

There was one of the now regular webcasts aimed at educating the adviser community on the merits of investment trusts as an option for their clients held the same day as the Alliance Trust AGM. The topic was the mechanics of investing so instead of the usual array of managers, representatives of the Association of Investment Companies, a platform provider, a market-maker specialising in the sector and an investment IFA assembled to provide their views.

Despite some compelling statistics on performance and total expense ratios, questions focused on the cost of advice and adviser remuneration. This whole exercise is pred-icated on the change in approach required after the retail distribution review. I came away with the sense that much of the adviser community has yet to get to grips with the changes. Broadening your investment product knowledge is becoming a high priority in my view.

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


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