American company comes marching in with Saints

0 Comments | Sunday Herald, The, Jul 11, 1999 | by Ian Fraser

SIR Jack Shaw is expected this week to announce a decision on the future of the troubled #615 million Scottish American Investment Company (Saints) with Aberdeen Asset Management strongly tipped to take it over.

Sir Jack, also the Bank of Scotland's acting governor, has been forced into taking action by the aggressive New York firm of arbitrageurs Elliott Associates. Last Wednesday, Saints revealed two of Elliott's funds had built up sizeable stakes in the investment trust, which is managed by Edinburgh-based Stewart Ivory.

Liverpool Limited Partnership, registered in Bermuda and Cayman- registered Westgate International, bought 10.6 million shares in the international generalist trust between July 2 and July 6. This represents a holding of 4.86% in the trust, which was founded in 1873 and is considered a bastion of Edinburgh's investment community. The trust had recently started buying back its own shares in an attempt to boost its performance, which one observer said has been "abysmal" over the last 10 years. Arbitrageurs such as Elliott target poorly performing investment trusts with the aim of exploiting the discount between the value of the trust's investments and the trust's share price. They do this by forcing the liquidation of the company and a distribution of its assets or by forcing management to take steps to narrow discounts. One way of achieving this would be for Elliott to push for the management contract to be transferred to another fund management group - in which case Aberdeen Asset Management would be the favourite thanks to its track record in split-capital investment trusts. However, Teddy Tulloch, a director of Stewart Ivory and investment manager on Saints, does not believe that Elliott will push for a change of manager. "They are abitrageurs so it's more likely they will be seeking to narrow the discount." Tulloch said the trust is primarily aimed at private individuals, and its portfolio of investments is designed to be resilient in economic downturns. He said it was "frustrating" that a group with short-term objectives should enter the fray just as the trust's performance is starting to pick up. But Peter Walls, investment trust analyst at Credit Lyonnais, had little time for such arguments. "The board is fairly establishment and they will perhaps be taken aback by the aggressiveness of Elliott's advances," he said. "They will try to take the high moral ground, claiming Elliott is a short- term investor whose presence is bad news for small investors. Such arguments are starting to wear a little bit thin in the investment trust arena. In my view arbs are beginning to play quite a healthy role in this sector." Financial observers were almost unanimous in their view that, however inconvenient Elliott's arrival on the share register must be for Sir Jack Shaw and his co-directors, it will represent good news for investors. One investment trust specialist added enigmatically: "The patient is dead, now they've got to organise the funeral." If the investment trust does end up being lost to another manager such as Aberdeen, observers predict Stewart Ivory will struggle to retain its independence. It derives a significant proportion of its total profits from managing Scottish American.