Results analysis: Alliance Trust

• Alliance Trust (ATST) has reported its half year results for the period ending 30 June 2022. Over this six-month period ATST has generated a NAV total return of -10.5%, ahead of both the -11% return of its benchmark, the MSCI ACWI, and the -13.5% median NAV total return of its peers. ATST generated an -11.3% share price return over the same period. The outperformance is in part due to the effective stock picking of its delegated managers, but also due to the increased pressure mega-cap growth stocks felt during the first half of the year, with ATST having long held an underweight to these companies.
• Over the six-month period ATST traded on an average discount of 6.3%, above the 5.9% average for the 2021 financial year. As of its half year end ATST traded on a 6.1% discount, and has remained largely in line with this level since, as it currently trades on a 6.4% discount (as of 27/07/2022).
• One of the major developments during the current financial year has been the pay-out of a higher dividend. The board have paid two quarterly dividends totalling 12p for 2022 so far, a 62% increase on the first two dividends paid in 2021. This increased dividend reflects the board’s desire to capitalise on ATST’s substantial distributable reserves, as well as ensuring that the policies of ATST remain aligned with shareholder needs.
• The other major change to ATST has been the loss of one of its delegated stock picking managers, the team at River and Mercantile. This was not due to investment reasons but the buyout of the management company. Willis Towers Watson (WTW) believe that the new owners of River and Mercantile will lack the same level of investor-alignment, a key factor in their manager selection process.
• The chairman of the board, Gregor Stewart, highlights the defensive nature of ATST in particular, commenting that: “Our diversified, high conviction approach protected shareholders from the worst of the first half falls,” and, “as market returns have become less concentrated, our diversified portfolio has fared better than those biased towards larger growth stocks”.

Kepler View

Alliance Trust's (ATST) recent six-month performance is, in our view, a reminder of the benefits of a diversified approach to investing. While ATST’s highly diversified approach had once caused it to lag its benchmark, due to the dominance of a concentrated handful of mega cap stocks, it is by the same merit that ATST has also outperformed over 2022 as the mega cap stocks, primarily the high growth names, have felt the brunt of the selloff. WTW specifically describe it as a pullback in the valuations of “blue-sky” growth stocks. We note that ATST’s six-month outperformance is made all the more impressive by its historic use of gearing, currently 6.2% net (as of 30/06/2022), which would have amplified its losses on the downside (though it has historically been a net benefit to shareholders given its long-term NAV growth). Beyond simply being diversified at a stock level, WTW also ensures that ATST has no material stylistic biases against its benchmark. This characteristic stands in stark contrast to many of its global equity peers, who have historically held much larger growth-stock biases, and have thus suffered far more over 2022.

We believe that ATST offers a core, ’one stop shop’ option for an investor’s global equity portfolio. Thanks to WTW’s strategy there is less chance of investors being caught on the wrong side of a market downturn, as the team ensures that ATST has no style biases which are one major source of potential underperformance. Given the experience and depth of resources available to the WTW team (as one of the world’s largest investment consultants), we have confidence that they will be able to maintain this balanced allocation.

While offering a diversified, on benchmark stylistic exposure, ATST offers a highly active approach to stock selection. WTW highlights GQG partners, a large-cap quality manager, as being one of the noteworthy examples of success over the last six months. While GQG has historically benefitted from the tailwinds behind technology stocks, the team had begun to rotate into energy and materials companies as early as 2021, placing them in a prime position to capitalise on the tailwinds behind the sectors in 2022 and putting them amongst the best performing managers over the last six months. We note that the combination of the redistribution of the River and Mercantile investment (which was distributed across a variety of managers) and the managers adapting to the changing macro environment, has led ATST to have an above average level of year-to-date turnover (c. 33%).

Though the selloff in equity markets has been largely indiscriminate, WTW are happy with the fundamental performance of their underlying holdings. In their view, once the broad-based selloff alleviates, fundamentals will become the primary driver of stock returns. They note that if we enter an era of structurally higher inflation, it may mark the end of the growth-style trend which had previously acted as a headwind against ATST’s performance.

ATST also offers a number of benefits beyond that of diversified active management, which further reinforces its use as a core equity exposure. We believe that the higher dividend is a clear benefit to shareholders. First, it is a better use of the trust’s structure as ATST’s significant distributable reserves make it more likely the higher payout can be sustained in the future. Secondly, we think it makes the trust a more attractive investment vehicle, which could increase the demand for its shares. This, in combination with ATST’s ongoing resilience in tough markets, may make its current discount of 6.4% an attractive entry point (as of 27/07/2022). The final feather in ATST’s cap is its ongoing responsible investment initiatives. Despite the tailwinds behind energy stocks, WTW continues to work towards its target of achieving net zero by 2050, as well as favouring active engagement as a way of achieving ESG goals. We remind readers that the board has put great effort into disclosing their engagement activities, both in their semi-annual report and also on their website, via quarterly responsible investment reports.

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