Merryn Somerset Webb talks to Katherine Garrett-Cox, chief executive of Dundee-based Alliance Trust, about a forthcoming showdown over the future direction of the trust.
I suspect that a good many of the people who make their way to Dundee to see Alliance Trust (LSE: ATST) find it less pleasant than I do. The city isn’t everyone’s dream home. But I go on a brilliantly sunny day in April – just before the royal wedding. I take the coastal train from Edinburgh and see little but charming coves, sparkling sea and even (oddly, given that it isn’t summer and it is the early morning) a man kayaking around the coast with no top on.
It isn’t quite what I expected. Then again, neither is Katherine Garrett-Cox. She’s been the target of a hundred scathing articles over the last few months and she is constantly hounded by activist investors trying to foist their management ideas on to her slim shoulders (see below). So I expect a woman under siege. I get a glam fest. She works out of a shiny black building in the centre of town (so close to the station that the first cab in the taxi stand refused to drive me there). Her chair is purple. Her office is huge and glass-walled. And her desk faces out over banks of busy-looking fund managers arguing about whether you can call the rise in commodity prices a supercycle or a pro-cyclical upturn. They settle on secular bull market.
As Katherine and I are both of an age, the first thing I notice (after the chair) is that she is wearing a statement pink dress and killer heels. I’m not. I instantly wish I was. I wish again later when I notice that all the women in the office are wearing fantastic shoes. What possessed me to wear a pair of slightly scruffy flats to Dundee when everyone knows that ladies dress better up north? And when I had specifically been instructed by an Edinburgh acquaintance not to be distracted by Katherine’s legs. I wonder if he was looking at her shoes when they met too.
Why is Alliance under siege?
As we are both middle-aged working mothers, we kick off with the au pair problem. Does the religion of the person looking after your children matter? Why? Is it legal to ask in an interview? Should it be? That kind of thing. Suddenly 20 minutes have passed. I’ve only got an hour. So we dive right in.
Activist investor Laxey Partners would have it that the key problem with Alliance Trust is that it trades at a whopping great discount to its net asset value (NAV), currently around 15%. They think the best way to sort this out is to put in place a formal discount control mechanism (DCM) so that the trust buys back its own shares as soon as they trade at more than a 10% discount to the NAV, for example.
Katherine and her board (who are generally considered a tad conservative) don’t fancy the lack of flexibility this would give them. So they argue the best way to close the discount is to perform well, hence creating the impression they will continue to perform well and upping demand for the shares. I rather agree. The problem with this, of course, is that until very recently Alliance hasn’t been performing particularly well at all. So what’s Katherine going to do about that?
First, confess. Performance over the last few years has “probably not been as sparkling as it should have been”, she says. Why? Because things weren’t properly organised. Her predecessor, Alan Harden – who left in 2008 – “was not an investment man”. He had a go at modernising the trust, but along the way he lost its way. He took Alliance into private equity, had a “big mandate” to develop the (still) loss-making Alliance Trust Savings business (a platform for self-invested personal pensions, individual savings accounts, and so on) and even opened a Hong Kong office. But his focus on all these things perhaps led to a “reduced focus on the investment side”. He may have modernised the nature of the business, but he left Katherine to “modernise the way people think”. Meaning? Five years ago there was no real asset allocation: there were regional pots of money (heavily weighted to the UK) and “these were rarely shifted”. At the same time the fund managers “weren’t really managed as such” – just left “to their own devices”.
No more. Katherine doesn’t like to be a “spectre”. She isn’t one for breathing down people’s necks, she says. But she does have a formal “asset allocation process” that she leads. She’s hugely cut down UK exposure, so that while about 30% of the portfolio remains in Britain, “only about 6%-7% of it is really focused on UK domestic companies”. She is also still shifting towards Asia, where she sees growth continuing.
Not worried about a crash in China then, I ask, kind of guessing that she isn’t. Katherine seems too calm to fret about the stuff we fret about at MoneyWeek. “Nothing moves in a straight line,” she tells me. Commodities? “A lot of hype.” Gold? “Not at these levels.” We move on.
A focus on stock-picking
Despite the discussion over asset allocation, overall it seems that Katherine isn’t really a macro person. And she doesn’t see Alliance as a macro place: at heart she’s a stock-picker, the kind of fund manager who likes to check out production lines for herself. That is where she sees Alliance having an edge: she hires stock pickers with a “strong quality bias”. She also looks to create constant dividend growth (an area where Alliance can at least justly say it has excelled, given that the dividend has been rising for 45 years) and worries about currencies – there is, she says, no point in making great capital gains in any one country only to have it all “unravelled” by currency moves. Overall, she thinks she is moving things in the right direction.
I wonder if the portfolio isn’t a tad unfocused. She does not. The trust did hold 500 different companies. Now it holds more like 190 on the equity side. I say that is still a lot. Katherine points out that her recent performance is better than some of the firms running 50-stock models. Then while she’s at it, she points out that total shareholder return (rather than growth in NAV) really isn’t that bad either.
Over the last three years the Scottish Investment Trust – which she considers a top rival – has returned 8.3%. She’s returned 17.9%. Even if you just look at the NAV, she’s coming out on top (13.7% versus 12.2%). The same goes for the Foreign and Colonial Investment trust (13.7% versus 8.8%).
The carpers will say that this just reflects the fact that she made a big move into cash in 2008. But performance is performance, however it is made, and moving into cash then was clearly a good asset-allocation decision. She hasn’t done as well as some other generalist trusts (Witan can claim 22% over the same time period). However, she has, as she quite rightly says, produced “pretty good results, actually”.
A message to the activists
I like Katherine. I’m impressed by her. But her detractors have reasonable points to make. Big discounts are irritating to investors who want to get out (although not to new investors, or perhaps to long-term investors). She is probably overpaid, or at least has had her pay rise too much in the last few years. And she might be better just to bump up her buy-backs or adopt a DCM to get everyone off her back so that she and the trust can move on.
If she “pays the greenmail”, says Robin Angus, Edinburgh’s trust guru, she can stop worrying, “stay at home and mind the shop”. After all, she is paid to be a portfolio manager, not to row with Laxey Partners.
But in the end, as Katherine says, she is trying to give people what they say want: diversified exposure to a global portfolio with a rising dividend. And she can be passionate about that. I usually manage to get a rise out of my interviewees within a matter of seconds of stepping into a room (key phrases for this are “stewardship”, “outrageously high fees”, “closet tracker fund” and “record gold price”), but with Katherine it took me until the end of our chat when I returned to the issue of her troublesome activists. If they don’t think she is doing things properly, she says with some feeling, they needn’t hang around. She isn’t a “foie-gras producer shoving things down their throats”. They don’t fancy her management? “Don’t buy the shares.”
In a few weeks (20 May), thousands of small shareholders will descend on Dundee for the annual general meeting. They will vote on whether to back Katherine (no DCM) or her critics (DCM). Laxey will be relying on shareholder apathy to give them the day. But Brewin Dolphin, which has a 5% stake in the trust, will be supporting Katherine. I suspect that if I were a shareholder (and I am beginning to wish I were), I would be too.
Who is she, and what’s the row about?
Katherine Garrett-Cox is a Durham history graduate, mother of four, and chief executive of Dundee-based Alliance Trust, the UK’s largest investment trust. She started her career at Hill Samuel where, by the age of 26, she was head of US equities and one of the most high-profile women in the City. She moved on to Aberdeen Asset Management, then to Morley, where she was chief investment officer, before moving to Dundee in 2008.
What is Laxey Partners and what does it want?
Years of below-average performance have landed Alliance with a big discount to net asset value (NAV) – its shares trade at significantly less than the value of their underlying assets. Laxey Partners is an activist investor that has bought a 1.7% stake in the £2.8bn trust and now wants Alliance to adopt a discount control mechanism (DCM) to prevent the discount ever going above 10% (it is currently 15%, but has been as high as 21%). That means buying back shares to cut supply and push the share price up. And it’s not just Laxey – US hedge fund Elliott International, which has a reputation for having been behind the break-up of several investment trusts in the 1990s – has acquired a 3% stake in Alliance.
However, Garrett-Cox remains opposed to instituting a DCM. She points out that only 45 of the 300-odd trusts around have DCMs and, while the trust does indulge in ad-hoc buy-backs, she worries that enforced ones would eat up the trust’s cash and make managing it even trickier than it already is. On 20 May detractors and supporters will meet at the AGM to vote on the matter.