Alliance Trust 27 February 2019

Alliance Trust (ATST) is one of the UK’s oldest and largest investment trusts and has delivered a growing dividend to shareholders every year over the last 52 years.

In 2017, the trust changed its spots dramatically, adopting an innovative portfolio management approach that uses eight managers, each tasked with managing a bespoke highly-concentrated portfolio, selected and overseen by Willis Towers Watson (WTW). WTW chooses a line-up of stock pickers that has similar characteristics to the MSCI ACWI benchmark, in terms of style, country and sector exposures, to ensure that performance is primarily driven by stock selection in the long run. As such, and with net assets of c.£2.7bn, ATST is a truly ‘global’ trust.

Having had nearly two years in the new form, the equity portfolio has generated a decent return during what could be considered a difficult global market for active stock selection. The equity portfolio has risen by 10.4% since the start of April 2017 to January 2019, outperforming the MSCI ACWI index by almost 1.6%. Relative performance was somewhat hindered over 2018, as we saw a much smaller than usual number of (large cap) companies outperform the index during the first nine months of the year and a strong, broad-based market correction in the final quarter.

ATST’s discount narrowed significantly on the announcement of the change in strategy in January 2017 and the board continues to manage the discount where necessary. Over 2018 the trust traded on an average discount of 6% and this has since come in to the current discount of 4.9%.

The early signs from the changes the board made in 2017 are good. In terms of performance, in NAV terms the trust has outperformed relative to the benchmark and sits within the middle of the pack in comparison to its AIC Global peer group. Although the trust marginally underperformed the benchmark in 2018, we understand that this was a challenging period for active stock selection. WTW make the point that thanks to their approach, it would always be difficult for the trust to outperform the benchmark in a period like the first 9 months of 2018 when the majority of stocks in the index underperformed.

As we saw towards the latter end of 2018, volatility is making a comeback. This can create some shorter-term mispricing and therefore, an environment ripe for stock pickers that focus on long-term fundamentals is beginning to emerge. We see Alliance Trust and their eight ‘best ideas’ stock pickers as a vehicle well-positioned to take advantage of this. By putting eight portfolios together, Alliance Trust shareholders benefit from all the advantages of concentrated portfolios, but with very little of the extra risk that such an approach necessarily engenders when applied by a single manager. Manager diversification means that there is no key man risk and means that the trust should be able to produce an outperformance of the benchmark long into the future.

Alongside this, the board’s clear commitment to tackling the discount, means a return to a double-digit discount is extremely unlikely (although not impossible). Having witnessed the reversal of fortunes at Witan under a ‘manager of managers’ approach we would not rule out the trust moving to a premium, in time, should the new managers deliver a long enough period of strong performance.