Alliance Trust 30 May 2023

Alliance Trust (LON:ATST) offers UK retail investors an opportunity to gain access to a sophisticated and professional investment strategy usually reserved for institutional investors. As discussed in Portfolio, under the management of global consultancy Willis Towers Watson (WTW), ATST provides investors with unique access to a diverse set of what the managers believe to be the very best global equity fund managers. The strategy boasts a high active share, with the delegated fund managers tasked with investing in a maximum of 20 of their highest conviction ideas.

ATST has outperformed over the past three years, benefiting from stylistic neutrality in a particularly volatile, macro-driven environment where it has been difficult for most active managers to generate alpha (see Performance). Over this time ATST has generated a NAV total return of 47.3% compared to the MSCI ACWI benchmark and the AIC Global sector average of 43.5% and 37.2%. The management team notes that the ongoing uncertainty and volatility present a good opportunity for stockpickers to generate alpha which may lead to continued strong performance. That said, the relatively low level of Gearing reflects a cautious outlook on markets overall.

ATST has also experienced a significant uplift in Dividend over the past two financial years with growth of 32.5% and 26% respectively. This has resulted in a dividend yield of 2.4% on an annualised basis. This maintains ATST’s track record of 56 consecutive years of dividend growth. ATST currently trades on a Discount of 6.0% in line with its long-term average.

We think ATST’s relatively strong performance over the past three years demonstrates the potential of its sophisticated strategy. The neutral stylistic exposure to global equity markets leaves investors less exposed to the macro factors driving short-term market returns which has proven valuable in a period of heightened volatility. We think the persistent volatility across financial markets should continue to create opportunities for the stock-picking expertise of ATST’s delegate managers to add value, whilst the diversification may provide some downside protection over the longer term.

In addition, we believe the significant uplift in dividend growth demonstrates the board’s awareness that shareholders value both growth and the security of a well-financed and growing dividend. ATST’s strong track record of dividend growth, the recent strength of earnings, and the depth of reserves lead us to believe that it will form a greater part of total returns should the lacklustre environment for growth continue.

With ATST trading close to its long-term average discount, we believe this may present a good long-term entry point. We believe the strong performance and uncertain market conditions are likely to make investors more aware of ATST’s ‘fire and forget’ strategy, alongside the new market-cap-like fee structure which will incentivise the managers to narrow the discount.