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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.
- Today Alliance Trust (ATST) released its annual results for the year ending 31 December 2020. Over the 12-month period, the trust delivered NAV total returns of 8.5%, while in share price terms the trust returned 9.4%. This compares to the benchmark MSCI ACWI Index return of 12.7%.
- Despite the pandemic severely impacting the dividends of many companies, ATST has continued its exceptional track record of dividend growth. Over the year the trust paid out dividends of 14.38p per share, representing an increase of 3% and the 54th consecutive year of dividend increases. The board used a small portion of its revenue reserves to support the payment.
- Looking forward, the board remain confident in the investment strategy. The high-conviction approach of the underlying managers together with the low correlation of their styles, should mean the trust is well positioned to take advantage of future alpha generating opportunities, in particular when market leadership broadens out from the small number of technology stocks that led 2020.
Kepler View
Like many other globally diversified strategies, ATST has faced a significant headwind in 2020. The pandemic has exacerbated volatility and large disparities in returns between country and sector, with US mega cap tech stocks delivering the bulk of the gains. In fact, up to 45% of the benchmark MSCI ACWI return over the period came from just five stocks. Apple alone accounted for 17% of the benchmark’s return over the period.
Against this difficult backdrop, the trust has still managed to deliver solid positive NAV returns of 8.5% and 9.4% in share price terms. We see this a respectable result and, while it has underperformed its benchmark for reasons already illustrated, the trust is now in a strong position to benefit from the expected post-COVID global recovery. With interest rates at close to record lows and governments prepared to support economies with extensive fiscal measures, the company’s investment manager, Willis Towers Watson, believes – as do we – that 2021 should be a positive year for equities.
However, given the amount of uncertainty still ahead, this may not be the time to take concentrated bets on particular countries, sectors or investment styles. In that context, ATST’s strategy of working with a globally diverse range of stockpickers, each one focussed on their ‘best ideas’, is apposite. When these best ideas are combined together, ATST’s portfolio offers the alpha generating benefits of a focussed approach as well as good diversification.
We also believe that an approach based on the fundamentals of companies through stock selection as its key driver, rather than macro factors, is well founded in this environment. ATST has a high active share (77%), which indicates that the managers are following just this approach. The benefits of this approach have been seen over the longer term. Since the current investment managers, Willis Towers Watson, were appointed to control manager allocations by the board in April 2017, the trust has delivered NAV total returns of 41.3% when one excludes the impact of the legacy non-core assets to the end of December 2020. This is in line with the benchmark (41.4%), but represents a significant outperformance of the MSCI ACWI Equal Weighted Index (24.7%), as well as a minor outperformance of the Morningstar universe of UK retail global equity funds (40.7%) over the same time period.
Alongside capital appreciation, 2020 saw another exceptional year of dividend growth for the trust. It was the 54th year of consecutive dividend increases, the third most of any trust in the investment universe. Dividends were supported by revenue reserves, which provide a cushion to protect the trust’s ability to continue to pay its dividend even if the underlying income from the portfolio is impaired – a feature unique to the investment trust structure. Distributable reserves to support future dividends could further increase in 2021, with the results referencing the fact that the board intend to ask shareholders at the forthcoming AGM for approval to convert the merger reserve of £645.3m into a distributable reserve. This would take total distributable reserves close to £745m, covering the most recent full year dividend more than 16x according to our analysis.
As of 03 March 2021, ATST is trading on a discount of 6.2% in comparison to a peer group weighted average of 3.2%. The uncertain trajectory of the economic recovery from COVID is likely to persist for some time. Against this backdrop, particularly for investors who look for an international equity exposure, ATST has solid appeal. The blend of growth and value managers under the same umbrella, as well as the focus on concentrated ‘best ideas’ contributed by each of the managers to whom the different sections of the portfolio are allocated creates a fund with the potential to outperform, regardless of the popularity of any particular investment style. In the meantime, investors can enjoy dependable income with a near unparalleled track record.
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