Cherry Reynard shows how three great global generalist trusts are benefiting from outsourced investment and a more active approach.
The giant global generalist investment trusts, grandes dames of the closed-ended world in terms of size and profile at least, have undergone a decade of significant change. They have realised that to stay relevant in an era of index-tracking funds, they have to do more than provide tracker-like returns and rely on the loyalty of their shareholder base. It has taken some longer than others. While their paths have been different, they have led to much the same place – outsourcing investment, lowering costs and becoming more active in their approach. The trusts have emerged reinvigorated.
Witan, set up in 1909 as a family trust to manage the Henderson family wealth and now with £2 billion under management, can justifiably claim to have led the charge. It started to shift its structure in 2004, having previously been an unexciting blend of internal managers from Henderson producing uncompetitive performance. The group moved to a multi-manager structure, though it was only with the appointment of Andrew Bell in 2010 that the trust finally shook off the last traces of its Henderson roots, becoming entirely run by external managers.
The ‘manager of manager’ approach adopted by Bell means the portfolio is parcelled up, with mandates handed out to specific managers. Some, including Artemis and Lindsell Train, are familiar names, and some – Heronbridge, Pzena, Lansdowne Partners – less well-known: a reflection of Bell’s broad approach. While he lets the global managers take care of their own asset allocation, sometimes he will tweak the end result using futures if he holds strong views on a particular region.
The trust also has a 12.5 per cent budget to allocate to ‘special ideas’. In the past this has included areas such as private equity and life sciences, and in general they have tended to be successful additions to the portfolio. In the past financial year, for example, this part of the portfolio delivered a return of 27.2 per cent, compared with 15.1 per cent for Witan’s benchmark.
Bell appears to have delivered a turnaround in performance. Since his appointment in 2010, the trust has outperformed its benchmark in five out of eight discrete years, according to data from Morningstar. David Holder, senior analyst in manager research at Morningstar, says: ‘Andrew Bell has taken a much more institutional approach to selecting managers, and performance has picked up nicely as a result.’
Holder also highlights the trust’s regular dividends. Although the yield is not particularly high at just over 2 per cent, the trust’s payout has grown regularly and it remains an important priority for the board. The trust has the highest dividend yield of the three trusts we look at in this feature.
Holder says that its relatively high weighting to the UK market sets Witan apart from the other global generalists. This spiked to around 34 per cent in February and is consistently around 30 per cent of the benchmark. It may reflect the preferences of the trust’s investor base, but it can influence performance when the UK has a bad run.
Set up in 1888 as a merger of three Dundee-based mortgage and land companies, Alliance Trust’s journey from stodgy global growth trust to its modern incarnation has taken many years, a lot of fighting and a number of false starts. Along the way in recent decades, the trust has launched its own asset management business and its own savings platform, had a flirtation with sustainable investment and replaced almost all of its board and investment managers. To say it has been shambolic at times would be an understatement.
Over this time, perhaps surprisingly, investors have stuck with the trust. A band of loyal supporters from its Scottish heartland have helped keep it afloat at a time when other trusts might simply have faded away. In its latest incarnation, following considerable pressure from activist investors Elliott Advisers and the departure of chief executive Katherine Garrett-Cox in February 2016, the board has appointed investment consultancy Willis Towers Watson to oversee the trust.
Willis Towers Watson now manages a group of eight fund managers on behalf of Alliance Trust.
Like Witan, the group is a blend of the recognisable – Jupiter, River & Mercantile – and the less well-known, including Lyrical Asset Management, GQG Partners and Black Creek Investment Management. The portfolio is 200 stocks strong, and is tasked with delivering 2 per cent above its benchmark (after costs).
The move to the new manager has not been met with universal approval. Tony Yousefian, research analyst at Fund Calibre, says: ‘The move to Willis Towers Watson as the investment manager is an unusual one and I’m not sure I understand the reasoning. I am sure there are many more experienced global managers out there who could have been approached about running what is a considerable value of assets under management (almost £2.5 billion). The Alliance Trust is an AIC dividend hero, but the yield is still only 1.9 per cent, despite many years of increases.’
Of course, Alliance Trust might argue that 12 months is a relatively short period to shift a multibillion pound portfolio. It can also argue that performance has been stronger since the changes. Holder says: ‘Willis Towers Watson has a track record of running similar mandates successfully. At the moment, it is difficult to say anything more than “watch this space”, but there has been a decent start to the process and we feel more positively minded towards the trust.’
Alliance Trust currently lies seventh out of 22 funds in the AIC global sector over three years, and has seen a significant narrowing of the discount.
Foreign & Colonial Investment Trust
Foreign & Colonial launched in 1868 with a focus on emerging markets bonds, and celebrates its 150th anniversary this year amid much fanfare. It can meaningfully boast that it has paid a dividend every year since inception .
The anniversary occurs at a good time for the £3.5 billion trust. Paul Niven, who took over at the helm in 2014, has proved himself a worthy successor to Jeremy Tigue. F&C sits sixth in the AIC global sector over three years, and seventh over one year. Holder at Morningstar says: ‘Paul Niven has brought real rigour to the management of the F&C Investment trust and has a strong handle on the underlying constituents of the trust.’ Niven is part of the wider, highly experienced BMO/F&C multiasset team.
As with the other global generalists, different elements of the portfolio are parcelled out among individual managers. The trust makes significant use of internal F&C managers, which helps keep costs relatively low, but its manager has the freedom to look outside as well. At the moment, Niven uses third-party managers where expertise is lacking – for example, he has brought on board Barrow Hanley and T. Rowe Price for US exposure. He also draws in external managers, notably HarbourVest and Pantheon, for the trust’s private equity exposure.
Yousefian likes the trust: ‘It’s another good one for delivering dividend increases, and has done so every year since 1970. It was trading around a 10 per cent discount to NAV and since the Brexit vote this discount has closed to around 1 per cent, which is where it is at present. This is an ideal trust for all those new to the investment trust world, looking for global exposure and not wanting to take too much risk.’
Tim Cockerill, head of research at Rowan Dartington, is generally impressed with the progress all three trusts have made. He says: ‘These trusts serve a good purpose. From a discount point of view, they all look quite healthy, and that has to be seen as a reflection of the actions they’ve taken to improve returns.’
The manager of manager route is not without its pitfalls: a trust’s managers need a clear exit route and shifting between managers can be protracted. Nevertheless, some – notably Witan – have moved between managers without significant disruption to the trust, which shows it can be done.
The trusts all look competitive on fees. Witan’s ongoing charge figure is 0.76 per cent; F&C’s is 0.79 per cent and Alliance Trust’s is a sprightly 0.54 per cent. All are markedly cheaper than some in the sector. Index trackers are where their main competition lies, but in general the trusts have added value over and above, say, a holding in the MSCI World index. Cockerill adds: ‘Over three years, F&C and Alliance are comfortably ahead of the MSCI World in sterling terms, while Witan is in line. This is a good place to be.’
The three trusts have come a long way and now look to be in robust shape for whatever lies ahead in markets over the next few years. They are all good one-stop shops for investors who want a diversified portfolio at low cost. For now, F&C appears to have the performance edge.
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