Alliance Trust 27 November 2020

Alliance Trust (ATST) is one of the largest investment trusts in the market, with gross assets of c. £3bn. As shown in the Performance section, since Willis Tower Watson (WTW) took over management in April 2017 would observe that performance has improved.

WTW employs a manager-of-managers strategy, giving each of the underlying managers the mandate to create a ‘best ideas’ portfolio of around 20 stocks with few restrictions. It was announced in September that Lomas would replace First Pacific Advisors (FPA), as we discuss under the Portfolio section. With this change in mind, WTW has continued to manage the allocations between managers to ensure performance is driven primarily by stock selection, rather than by sector, style or country weighting. The team hope to generate the levels of alpha associated with concentrated portfolios without the risk of a single portfolio.

Alongside capital appreciation, ATST currently offers a yield of 1.7% and is considered a ‘dividend hero’ by the Association of Investment Companies (AIC). The trust has an exceptional dividend growth track record, having increased its payout every year for the past 53 years. ATST’s board has proposed a vote at the next AGM to make the merger fund distributable. If this is vote is passed, based on current figures we estimate this would cover the most recent dividend close to 16x. Current revenue reserves offer c. 2.35x cover the FY 2019 dividend. In 2020, the board introduced a Dividend Reinvestment Plan. This offers investors a considerably more cost-effective approach to reinvesting dividends and has several long-term benefits, as discussed in the Dividend section.

Currently, the trust trades at a discount of 4.3%, marginally wider than the sector’s weighted average of 4%.

The unpredictable conditions caused by Covid-19 have illustrated the difficulties of being an active fund selector. The pandemic has unleashed volatility, sharp changes in market direction, and huge disparities in returns between country and sector. ATST offers a skilled, experienced management team with the resources to operate in such an environment. Additionally, the WTW team’s disciplined approach to building a benchmark and managing exposures carefully should ensure the trust is not overexposed to any one factor or macroeconomic outcome – a crucial potential advantage in a time of so much uncertainty.

We believe the volatile markets seen over the first 10 months of 2020 are likely to continue for the foreseeable future, and ATST is a trust with the ability to benefit from this. The blend of growth and value managers under the same umbrella creates a fund with the potential to outperform, regardless of the popularity of any particular investment style. WTW seeks to avoid the potential trap of overlapping holdings by selecting managers with a range of complementary approaches, which means they should naturally avoid each other’s holdings.

While the income generated by the fund is not massive, for long-term shareholders the compound effect of this income being reinvested could be significant. The consistency with which the dividend has been paid, over 53 years, on a progressive basis whilst currently supported by very large reserves is an additional point in its favour.