Alliance Trust 26 May 2021

Alliance Trust (ATST) follows a well-diversified approach to global equity investing, while still retaining the benefits of active management. ATST’s management has been delegated to Willis Towers Watson (WTW), the global investment consultancy. WTW brings with it a huge depth of resources, whereby 4,000 researched equity long only asset managers are condensed into a list of 20 potential managers, those which WTW deems to be both best in class and skilled at managing concentrated portfolios. For ATST’s portfolio, WTW currently utilises 10 of these managers blended with complementary styles in such a way as to diversify away the vast majority of factor, sector and regional risks relative to benchmark while still retaining the benefits of active management, as demonstrated by the trust’s high active share.

ATST’s portfolio is a unique combination of managers, as each manager invests in a customised portfolio of highest-conviction stocks, as opposed to replicating an existing strategy. ATST offers retail investors one of the few ways they can access some of the underlying managers, given their services are often not available to UK investors. Likewise, WTW’s advisory investment services are also typically reserved for large professional clients.

ATST’s long-term performance has kept pace with global markets, while its performance over the last 12 months has been strong, with the trust outperforming both its benchmark and peers. We cover this in more detail in our Performance section. ATST also has one of the longest track records of dividend increases of any investment trust. Shareholders have recently voted to approve a change in its reserve structure, which may lead to a potential dividend cover of 19x, providing it with enormous support for future dividend payments.

ATST offers clients a singular solution to global equity investing, providing them with a diversified exposure to global equity markets while preserving the benefits of active management. We believe ATST could be used to replace a passive exposure to global equities (given the trust’s near-identical factor and regional exposures), or for an investor who wishes to add potential alpha to their pre-existing allocation.

We believe that retail investors may find additional attractions in ATST. These include the unique exposures that ATST provides, given its use of managers which are not typically available. The trust also gives investors access to the investment capabilities of WTW for the complex task of manager assessment and monitoring along with risk management and portfolio construction, making ATST a ‘fire and forget’ style of investment.

While recent markets have not suited active stock-picking, given the concentration of returns around mega-cap and growth stocks and strong market momentum since 2019, we believe ATST’s competitive returns are encouraging given WTW actively seeks to diversify away from such exposures. Thankfully, as said momentum dissipates, active management can return to prominence as stock-specific factors begin to dominate, something we have already begun to see in ATST’s recent 12-month outperformance.

While ATST’s discount has been largely consistent since WTW took over, the advent of a stock-picking-friendly market could be the catalyst for further outperformance, which may in turn lead to a narrowing of the discount.