David Johnson
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Updated 28 Feb 2022
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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) has reported its annual results, for the financial year ending 31 December 2021. Over this 12 month period ATST generated a NAV total return of 18.6%, and a share price total return of 16.5%, compared to the 19.6% return of its benchmark, the MSCI ACWI.
  • While ATST’s performance is strong in absolute terms, its relative underperformance was the unfortunate result of stylistic headwinds its highly diversified approach faced, as during the final quarter of 2021 global equity markets were led by a narrow group of mega cap tech companies.
  • A major change for the trust over its financial year was in the substantial increase in the level of dividends it paid, reflected in the third and fourth interim dividend, which increased 32.5% year-on-year. While ATST has a historic dividend yield of 1.8%, were its dividend increase applied to its first two payments, it would have resulted in a yield of 2.3%, greater than the 1.8% yield of its benchmark. ATST’s recent dividend marks the 55th year of consecutive payments, one of the longest track-records of any investment trust.
  • The board continue to advance the integration of ESG, having now committed to a net-zero emissions portfolio by 2050.
  • It has also engaged in a proactive share buy-back policy over 2021, repurchasing 4.2% of its share capital at an average discount of 6.1%.
  • Gregor Stewart, chairman of ATST commented: “The company has delivered a strong absolute performance with a Total Shareholder Return of 16.5%. Against the backdrop of new Covid-19 variants, increasing inflation and a few large technology companies dominating returns, this was a robust result although behind our benchmark.”

Kepler view

Under the stewardship of Willis Towers Watson (WTW) we believe that Alliance Trust (ATST) continues to offer a genuinely differentiated approach to global investing, combining a portfolio of best-in-class delegated managers (in the eyes of WTW) with an on-benchmark risk profile. In doing so WTW has created what we believe is an interesting ‘one-stop-shop’ solution to global equity investing with outperformance potential. ATST has a diverse, low-factor-risk portfolio with all the benefits of active management, as it still has a 75% active share despite its c. 200 holdings. ATST continues to be allocated across ten different management teams (with one manager delegated two mandates), though we note there were two new managers added over 2021, Sands Capital Management and Metropolis Capital, and one was terminated, Lomas, due to the closure of the firm.

ATST’s underperformance versus its benchmark has been the direct result of the leadership of a handful of mega cap stocks, especially the dominance of US technology giants, with the eight largest constituents of the MSCI ACWI being US tech giants and accounting for c. 15% of the index. It was the direct result of a strong Q4 rally in this small cohort of stocks that ATST modestly underperformed, after outperforming in the three quarters prior to this.

This is the outcome of what is probably one of the worst macro environments for ATST’s approach. ATST’s portfolio is made up of what their delegated stock pickers believe are the most attractive long-term investment opportunities across a diverse range of regions, styles, and sectors. This means that it the underlying managers are unlikely to collectively overweight a handful of mega cap technology stocks. Instead, ATST had an overweight position to mid- and small-cap companies over its financial year, where managers are often able to add value over the long run in under-researched sectors. This allocation was unfortunately the largest drag on ATST’s relative performance due to the dominance of mega-cap stocks. We note that ATST’s stock pickers were able to add value by picking small caps which outperformed, as well as selecting a number of strong performing stocks in the healthcare and communication services , such as Novo Nordisk and Verizon Communications.

We note ATST has a cheaper portfolio than the MSCI ACWI benchmark, with a lower P/E ratio but higher earnings per share growth. We think this may position ATST well for the near-term, as it could help partially insulate its portfolio from the impact of rising interest rates.

Thanks to operational improvements and potential macro tailwinds, ATST’s currently wide discount of 8.7% (as of 25/02/2022), may offer an attractive entry point, given that it is wider than its peer group’s 6.9% simple average, as well as its own five-year discount of c. 5.6%. We think ATST’s diverse approach to active investing may soon come back into favour. Thanks to rising global interest rates, the high-growth areas of the market may soon come under increasing pressure, as investors scrutinise their stretched valuations, with the aforementioned mega-cap technology stocks being counted amongst this cohort. There are also recent operational improvements to ATST which may also increase shareholder demand. ATST’s recently increased dividend is one such example, as the trust’s increased yield coupled with its huge £3.3bn distributable reserves should be of increased attractiveness to income-oriented investors. Furthermore, its ever-improving ESG credentials should make the trust more palatable to sustainable-minded investors, with the board having not only adopted a net-zero mandate, but also increasing ESG disclosures in its annual report. WTW also acknowledges the common trend of climate solutions within many of their delegated stock pickers.

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