Results analysis: Alliance Trust

• Alliance Trust (ATST) released its interim results this morning showing an NAV total return of 14.8%, outperforming its benchmark – the MSCI All Country World Index (MSCI ACWI) – by a margin of 3.7% over the six months to 30 June 2021.
• The trust’s strong performance was primarily driven by stockpicking; its high conviction ‘best picks’ approach and strong suite of underlying managers working well in an environment where wide spreads were witnessed between the performance of individual companies.
• Despite the trust’s strong performance, negative investor sentiment toward the AIC Global sector as a whole meant total shareholder returns were slightly less (11.1%) as the discount widened during the period to stand at 6.3% at close of business last night, wider than the peer group average.
• The board has also announced plans to review the level of funding behind the dividend. Chairman Gregor Stewart said: “With increased dividends expected as a result of the global economy re-opening, and the further flexibility that the conversion of the Company’s £645.3m merger reserve provides, the board has started a review of the level and funding of its dividend payments. It will examine if and how the company could deliver a more attractive and sustainable level of dividend to shareholders, without changing the investment strategy.” The trust currently yields 1.4%, and any changes to the dividend would likely have an effect on demand for the trust’s shares among income focused investors.

Kepler view

The last six months provide an interesting picture, in our view, of what is possible for Alliance Trust (ATST).

Willis Towers Watson (WTW) took over as managers of the trust in 2017, and spent much of the first year of their tenure renovating what was at the time a very large, very dull portfolio and turning it into the animal we know today – a series of ‘best picks’ portfolios managers by leading stockpicking managers identified by WTW all around the world.

With that job done, the newly revamped trust was then faced with a momentum driven market where investors were piling into trends and themes with little regard for individual companies’ fundamentals. This began in 2019 and continued, via even greater momentum shifts between growth and value during the most intense phases of the COVID crisis, until the first quarter of this year.

Against that backdrop – the overhaul of the portfolio and disposal of old assets, and then a long momentum driven rally totally unsuited to stockpicking strategies – WTW have delivered a creditable outperformance of the benchmark MSCI All Country World Index (MSCI ACWI) of 1.2% since their appointment¹.

Over six months, however, in an environment where company fundamentals have once again been absolutely at the forefront, the managers selected by WTW have been able to show their true colours, delivering a solid 14.8% NAV total return and putting a chunky 3.8% margin of outperformance between the trust and the benchmark.

We think the near term environment remains positive for stock picking, not only due to the subsiding of the pandemic-induced momentum factors, but also due to the potential disparity in the global recovery, with varying levels of stimulus and effectiveness in tackling the pandemic around the world. The managers believe that such an environment would increase the divergence of single stock returns, thereby creating greater opportunities for stockpickers.It is interesting that this strong performance has coincided with interest in the sector as a whole declining markedly, undermining demand for shares across the sector and resulting in wider discounts across the board (see chart above).

As at 30 June the trust had seen its discount widen by 3% since the start of the year, putting it at roughly the same level it stood in June 2020, and it has subsequently widened further to stand at 6.3% at close of business yesterday.

We note that board has announced two new initiatives which could help draw investors attention to the trust and offer support for the shares going forward.

Firstly, a limited exclusion screen has been introduced which prevents exposure to the most environmentally damaging industries and is part of a long term goal for the portfolio to be carbon neutral by 2050. This should find support among younger investors who are known to value ESG more highly than their cynical elders, and broader support buoyed by the focus now placed on ESG by professional investors, often from boardroom level down. Recent research from the Global Sustainable Investment Alliance found that over a third ($33 trillion) of all professionally managed assets across Europe, the US, Canada, Japan and Australasia are held in sustainable investments.

Secondly, the board announced this morning that it plans to review the way that the trust’s dividend is funded with a view to making it more attractive to investors. Alliance Trust already has an unbroken track record of 54 years of rising dividends, albeit at a modest rate (currently yielding 1.4%), but with the economy re-opening, significant revenue reserves, and a £645m merger reserve at its disposal, we would be interested to observe the effect of any changes to the dividend which result from this review.

It is our view that these factors combined, particularly if the stockpicking managers behind the portfolio are able to maintain the kind of performance we have seen recently, put Alliance Trust in an attractive position for investors seeking diversified exposure to global equities, with the potential for good NAV returns and perhaps a narrower discount in the future.

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_Notes:

_{1 – 1 April 2017 to June 30 2021}