Alliance Trust 21 December 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Alliance Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Alliance Trust (ATST) follows a multi-manager approach to global equity investing, with the board having delegated the management of ATST to Willis Towers Watson (WTW), the global consultancy firm. The Alliance Trust Investment Committee team of Craig Baker, Stuart Gray and Mark Davis at WTW select a suite of managers from a long list identified by their manager research team.
As discussed under Portfolio, ATST’s underlying managers have very distinct styles. Each manager is asked to run a concentrated portfolio of their highest-conviction ideas, with the WTW team then weighting the managers in a way that ensures ATST’s factor risks do not deviate from those of its benchmark, the MSCI ACWI. The central idea behind this strategy is that over the long-run fundamentals should drive performance, even if they can be drowned out by noise in the short-term.
For much of the pandemic period, this balanced approach has been struggling against a market seeing strong stylistic outperformance. ATST’s underlying equity managers’ performance (a metric which removes the effect of underperforming legacy assets) was ahead of the benchmark until November, which saw a sharp correction in markets due to the emergence of the omnicron variant (which will hopefully be shortlived) as we discuss in the Performance section.
In the current year one of the most substantial changes to ATST has been a positive resetting of its Dividend. The board has proposed to substantially increase this, rebasing the dividend upwards to 5.825p a quarter. Annualising this payout, the trust offers a dividend yield of 2.3% on an ongoing basis. ATST has a track record of 54 years of consecutive dividend increases, with the board committed to continuing this record even at the higher level. ATST currently trades on a 7.4% discount, in line with its long-term average.
ATST, in our view, is a good example of a ‘core’ equity holding. This is not merely due to its on-benchmark risk profile, but also due to its ability to preserve the benefits of active management at the same time. ATST is often the only way that retail investors can access the services of the underlying specialist managers, as they seldom market their services to UK retail investors.
Additionally, ATST offers an enviable track record of dividend growth, and the higher payout should make the yield even more attractive. In a similar manner, ATST’s ESG characteristics remain superior to those of its benchmark, with the board’s clear commitment to ensuring ESG remains a core part of the strategy being an attractive feature. We believe ATST would also serve as a strong alternative to passive equity exposures, as it would not materially alter an investor’s risk profile while still retaining the potential for added alpha; alternatively, it may suit investors looking for a simple solution to broad equity market exposure.
During the pandemic, markets have been dominated by style, with growth outperforming substantially for long periods and a sharp snap-back for value in the middle. These movements have been unpredictable, based on developments in the pandemic rather than anything economic. The benefit of ATST’s approach is that the management team aren’t asked to predict these unpredictable moves. During strong trending markets this style will underperform, but it is over the long run that it needs to be judged.
|Offers exposure to specialist managers not available elsewhere
|May underperform in momentum-driven markets
|Forthcoming dividend increase will lead to a higher future yield
|Gearing can amplify losses on the downside
|Attractive characteristics for a ‘core’ equity allocation
|Resurgence of pandemic may not suit balanced approach in the short term