Investors have been rewarded with decent gains but outperformance is another matter
Thursday 25 Jul 2019 Author: Daniel Coatsworth

Now into its third year under a new strategy born out of pressure from activist investors Elliott Advisors and to a lesser degree Laxey Partners, Alliance Trust’s (ATST) shares are trading at an all-time high and investors are enjoying double-digit returns so far in 2019.

Elliott Advisors is no longer a shareholder and Alliance Trust has nearly sold all its non-core investments with just a bit of property and some mineral rights needing to find a new home.

Once complete it will be left as a pure equity fund.

The investment trust switched strategy in April 2017 when financial advisory group Willis Towers Watson picked a panel of eight fund managers who each provide up to 20 of their best ideas that now form the Alliance Trust portfolio.

HOW HAS IT PERFORMED?

In terms of returns, the investment trust underperformed its MSCI All Country World benchmark in 2018. However, if you focus purely on the equity portfolio and ignore the non-core bits that are being, or were recently, sold then you’ll see it did beat its benchmark by 1% between the start of the new strategy and the end of 2018.

This year it has so far kept pace with the benchmark with a 16.7% gain in net asset value (NAV) to 30 June 2019. The recent performance is positive but ultimately Alliance Trust is not yet delivering on its target of beating the benchmark by at least 2% a year after costs (over rolling three-year periods). It needs to outperform otherwise investors might as well own a tracker fund.

If you include both the equity and non-core components, its NAV has increased by 15.9% and share price by 16.2% since the new strategy began in 2017 (up to 30 June 2019), whereas its benchmark has advanced by 18.9%.

These performance statistics might explain why the investment trust still trades at a discount to NAV – currently 5.4% versus an average 6% discount over the past 12 months.

Even though the Elliott Advisors debacle was high profile at the time, Alliance Trust has arguably fallen beneath the radar of many investors since the strategy changed. Indeed, Mark Atkinson, marketing and communications manager at Alliance Trust, suggests the current discount to NAV is partially down to investors still not appreciating the strategy and board change.

In March, Winterflood analyst Simon Elliott – no connection to the aforementioned ex-investor Elliott Advisors – wrote that Alliance Trust’s performance since the restructuring hadn’t been good enough to differentiate it from a competitive peer group. And that is a fair point which is still relevant today.

Fortunately 2019’s performance has given Alliance Trust an edge. Both Witan Investment Trust (WTAN) and F&C Investment Trust (FCIT) have a similar multi-manager strategy, offering investors access to a range of best ideas from around the globe. Witan’s NAV is up 13.5% this year and F&C’s is 14.3% higher – so both lagging Alliance Trust’s 16.7% gain. It needs to keep delivering this superior performance to stand out from the crowd.

TOO EARLY TO CALL

Atkinson argues that it is too early to judge whether Alliance Trust’s new approach has been a success.

‘Just over two years is too short to judge a new strategy, although you must appreciate it isn’t actually a new approach as Willis Towers Watson have been running it with institutional investors for more than 10 years,’ he comments.

‘Bringing together best-in-class fund managers and using their best ideas is a tried and tested approach.’

What's in the portfolio?

The biggest names in the portfolio are Google’s parent company Alphabet, tech giant Microsoft and and Indian financial services group HDFC Bank.

Investors are also getting exposure to the likes of airline Ryanair (RYA), food packaging group Crown and specialty materials provider Celanese.

Recent additions to the portfolio include outsourcing group Capita (CPI). ‘While it has experienced distress in recent times, notably issuing a profits warning shortly after the collapse of rival Carillion in January 2018, in the manager’s view the company is now starting to see benefits from wide ranging changes introduced by CEO Jonathan Lewis following his appointment in December 2017, and represents an attractive opportunity at a suppressed valuation,’ says Alliance Trust.

‘Planned cost reductions are progressing ahead of schedule and management hold a bullish outlook for the company’s future free cash flows and operating margins.’

ONE-STOP-SHOP

The new-look Alliance Trust is pitched as a one-stop-shop for global equities. Atkinson says it isn’t meant to be the only product you need for equities, remarking that it could work as the core holding in a portfolio and that many investors will also want to hold more specialist funds or as satellite holdings.

‘If you don’t have spare time or the skill to select the best fund managers, Alliance Trust will do it for you. Our managers are also generally not available to retail investors, providing another advantage to owning our investment trust,’ adds Atkinson.

He says many investment funds contain a mixture of a fund manager’s best ideas and ‘filler’ to help balance the portfolio for risk management purposes. ‘Our portfolio only has the best ideas. We blend the types of managers to get risk control.’

DIFFERENT STYLES

The eight managers currently on the Alliance Trust panel have a value, growth or quality approach when it comes to stock selection. Having a mixture of them acts as a cushion when one of the styles is out of favour.

‘A lot of people compare us to big global funds. We’re not like Terry Smith at Fundsmith or Nick Train from Lindsell Train; they face a challenge when their investing style is out of favour whereas we are an all-weather vehicle.’

The growth style managers have done very well at Alliance Trust, according to Atkinson who says they’ve delivered 20% to 30% outperformance. The value managers have struggled due to the style being out of favour.

‘Interestingly we had a growth manager and a value manager at our recent annual shareholder meeting. The value guy manager was more optimistic whereas the growth manager was more nervous, despite delivering years of outperformance with their style.

COMPARING CHARGES

Alliance Trust’s ongoing charges are 0.65% which are very competitive for a global investment trust. While you could certainly get global exposure for a lot less via exchange-traded funds, the average open-ended fund costs 1.4%, claims Atkinson.

Fees are unlikely to get lower unless Alliance Trust significantly grows in size. However, the investment trust has recently done something extra to hopefully help investors, namely adding an ESG layer to the fund managers’ investment decision making.

It has appointed sustainable investing expert Hermes to provide Alliance Trust’s panel of fund managers with guidance on ESG issues for their investments, such as ways in which to vote at shareholder meetings.


SHARES SAYS: Low-cost multi-manager investment trusts are a good concept for investors who want the tap the best ideas from a range of different people in a single product.

Alliance Trust still has a lot to prove, but so far its simplified approach has a lot of merit and certainly this year’s performance is encouraging. If you don’t already have such a product in your portfolio, Alliance Trust is certainly worthy of consideration alongside F&C and Witan.

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