Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

We compare two big names in the investment trust space
Thursday 22 Mar 2018 Author: David Stevenson

Investment trusts are constantly evolving in their pursuit of income and capital appreciation. We look at two trusts that employ a multi-manager approach: Alliance Trust (ATST) and Witan Investment Trust (WTAN).

Using multi-managers is when a trust delegates some or all of the equity portfolio to external management. Alliance Trust employed this style most recently, hiring Willis Towers Watson to appoint eight external managers to manage its entire equity portfolio last April.

WHY DO THE TRUSTS EMPLOY THIS APPROACH?

Clare Dobie, non-executive director of Alliance Trust, says the move, approved by shareholders, was due to anxiety about single managers or style and a way to ‘diversify manager risk’.

Witan has been using this style far longer, adopting it in 2004 although in addition to 10 external managers it still has its own ‘direct holdings’ portfolio managed by CEO Andrew Bell and investment director James Hart.

One charge often laid against using this style is added costs as each external manager will charge a fee, so costs could be potentially significant. However, Witan’s ongoing charges including performance fees is 0.78% whereas Alliance Trust is even cheaper, targeting 0.65% per year all-in.

While Witan’s use of external managers was a gradual process prompted by the dotcom crash in 2000, Alliance Trust has had a far more dramatic journey to using this style.

The trust was involved in a fierce spat with US activist hedge fund Elliott Associates which was one of its major shareholders who had been complaining of underperformance for some time.

Alliance Trust spent £339m buying out the US fund’s shareholding. The result of the buy-out and further rounds of share buybacks was a significant reduction in its discount to net asset value (NAV), which now averages around 5.4%. This is a significant narrowing from the 13% discount at which it was trading in 2016.

INV1

HOW HAVE THE TWO TRUSTS PERFORMED?

Witan trades at 1.4% discount to NAV, having reduced it from 4% in 2016. Its total return to shareholders in 2017 was 22.1%, ahead of the trust’s benchmark, a composite of the FTSE’s All-Share, North America, Europe and Asia Pacific indices which advanced 15.1%.

Alliance Trust also beat its benchmark for 2017, the MSCI All World Index which rose 13.8% compared to the trust’s total return of 19.2%.

However, for a true like-for-like comparison with Witan, Alliance Trust’s equity portfolio returned 9.8% in the nine months from 1 April 2017 when it introduced its multi-manager system. Its benchmark returned 7.6% during the same period. Alliance Trust’s return adds up to an outperformance of 2.2% versus Witan’s 7% outperformance of its benchmark.

HIGH CONVICTION STYLE

Craig Baker, chief investment officer of Willis Towers Watson, describes the style of Alliance Trust as high conviction. Indeed, the eight managers each have a maximum of 20 holdings, apart from its emerging markets manager, Rajiv Jain of GQG Partners, who has circa 50 names.

Jain says this is due to extra risks involved at the ‘country level’ in emerging markets where there is much greater disparity between monetary policies for example within the regions compared to developed markets.

This high conviction portfolio contains just 189 stocks and so is far more concentrated than Witan’s portfolio which approaches 400 names. Both trusts include Rajiv Jain as an external manager; he is seen by many as a rising star of emerging markets investment.

Baker at Willis Towers Watson maintains that although the portfolio is made up of each manager’s top picks, there is relatively little cross-over between holdings with only 11 stocks overlapping and only one which three managers have selected.

One benefit that Baker identifies in a trust like Alliance Trust using his firm is that it gives retail investors access to the type of expertise usually reserved for institutional clients.

Alliance Trust’s Dobie says that not only do Alliance’s investors have access to the managers’ expertise, they even have the chance to meet them when Alliance Trust performs various roadshows every year.

KEY DIFFERENCES

One major difference between the two trusts is transparency. Witan reveals the performance of its external managers when releasing the results; Alliance Trust is more secretive.

CEO Andrew Bell and investment director James Hart outperformed the external managers, with their picks returning 27.2% compared to their best performing external manager Lindsell Train in Witan’s portfolio which returned 21.8% in the same period.

For now, Alliance Trust will only say the best manager had beaten the index by 7% since the change in strategy, while the worst had underperformed by 1.5%.

Witan also re-jigged its external managers during the past year, bringing in the aforementioned GQG Partners and replacing Marathon with two new Europe ex-UK managers, Crux and SW Mitchell.

Even though Alliance Trust is in the early stages of its multi-manager journey, Baker says there’s ‘constant debate’ whether their managers are the best. He says the trust will probably employ a ‘one in, one out’ policy when it comes to changing its external managers.

Both trusts have high active share, Witan at 77% and Alliance Trust at 79%. This means a portfolio is distinct from its index and provides genuine active management rather than being a closet tracker. (DS)

‹ Previous2018-03-22Next ›