Spotlight on Alliance Trust: has move to multi-manager approach worked?

Two years ago, the board of Alliance Trust sacked its internal manager and switched to a multi-manager approach, in a bid to improve performance. How the overhaul is shaping up?

The past decade has been far from a quiet affair for one of the oldest investment trusts, which prides itself on its long-term focus of “investing for generations”.

Over the period, Alliance Trust has had to contend with two separate attacks from activist investors in the form of Laxey Partners and Elliott Associates, both of which played their part in the trust’s decision to change tack a couple of times in regards to its investment philosophy. Fund managers have also been chopped and changed, as has the board, with the longest-serving member, Gregor Stewart, taking up his position in 2014.

Both the old and the new boards had the same aim, in that changes needed to be implemented to resolve the problem of the global portfolio’s chronic pedestrian performance, which for much of the past decade had left Alliance Trust languishing on a discount of over 10%. But along the way, repeated changes in the manager steering the investment decision-making have led the trust to lose both its focus and its sense of direction.

The latest change, which has seen Willis Towers Watson take the controls, aims to accelerate performance by doubling the investment target to outperform the MSCI All Country World index by 2% a year, net of costs, over rolling three-year periods. Under a multi-manager structure, eight managers have each been tasked with running a ‘best ideas portfolio’, which typically contains around 20 stocks.

Key facts and figures  
Ongoing charges figure 0.65%
Dividend yield 1.8%
Months dividends are paid Mar, Jun, Sep, Dec
Share price one-year high 789p
Share price one-year low 669p
Net gearing 4.1%
Discount 5.3%
Gross assets £2.8 billion

Source: Alliance Trust, as at 16 May 2019

Falling short

These are early days, but over the two years since April 2017 (when Willis Towers Watson became the manager), the total shareholder return stands at 13.1%, below the MSCI All Country World index return of 14.3%. The NAV total return has also fallen short, delivering 13.4%.

Craig Baker, the puppet-master pulling the strings in terms of manager selection and the portfolio’s weightings, points out that it has been a tough period for active fund managers, with a small number of US technology stocks wielding a huge influence. He adds: “In an ideal scenario we would have outperformed since inception, but for active stockpickers it has been a difficult period. But as it has only been two years, we have not yet reached a point where a judgement can be made on the performance of the portfolio.”

While Baker says he is “not a fan of performance attribution analysis” as a means of explaining the shortfall, the overall portfolio has suffered by having a lighter weighting to the US than to its benchmark index, and by opting for a bigger portion of its assets in the UK and Europe.

However, he is pleased with the way the portfolio has protected on the downside – achieved through a mixture of growth and value investment styles. The managers are a mix of recognisable names, such as Jupiter’s Ben Whitmore and River and Mercantile’s Hugh Sergeant, and those whom UK fund fans will be less familiar with, such as Andrew Wellington at Lyrical Asset Management and Bill Kanko of Black Creek Investment Management.

“We are basically asking the fund managers to invest in a way they would for their own personal portfolios – pick your best ideas in any sector or country. They cannot manage money in the same way at their own firms, as they would need to hold more like 50 stocks rather than the 20 I am asking them to pick. We want to avoid ‘fillers’, those stocks that tend to only be a small position in a portfolio and are put in for risk control purposes,” says Baker.

The exception to the 20-stock rule is the emerging market specialist, GQG Partners, which holds 60 stocks. Baker says this is to reduce risk, while the 16% weighting to Asia Pacific and emerging markets in general is in place because he does not want “a strategic underweight to emerging markets to drive performance”.

How the big three multi-manager trusts have fared since the Alliance Trust shake-up

A graph showing the performance of three multi-manager investment trusts

 

High-conviction portfolio

In total, this takes total stock holdings to 200, a high number for a global equity fund; but Baker insists it is both high-conviction and truly active, evidenced by the portfolio’s 80% active share. “This portfolio looks nothing like an index and is both more global and more active than a global fund. Another difference is that the performance will not be driven by the top five winners or top five losers over a given time period; it will instead be a collective effort. For example, our biggest holding Microsoft has a weighting of 1.9%.”

To date Baker has stuck by the eight managers he picked at the outset. He says he is happy with how they have all fared, even those who have underperformed. “The large-cap growth fund managers are at the top of the leaderboard, whereas the more value-orientated stockpickers are at the bottom over the two-year period. If they all outperformed there would be a style bias, which is what we do not want.”

He adds he is more likely to add another manager rather than replace an existing one, but he stresses that each manager has been selected for the ability to add value and will ultimately have to back that up with performance.

But Alliance Trust’s shareholders have no way of knowing how each individual manager has performed over a given time period, as the information is not made available, not even in the annual report. This goes against the current regulatory pressure that is being put on fund managers to be more transparent with investors.

Baker says keeping the fund managers’ performance figures between himself and the board should be seen as a strength. “We do not think it is in the interests of the underlying investors to know the performance of each individual manager. The reason we don’t disclose the performance of underlying managers is because we do not want to fall into the trap of one of the biggest problems in the fund management industry – short-termism. It is not because we do not want to be held to account.”

Baker adds that Alliance Trust offers shareholders “full transparency” in terms of the performance of individual holdings. He does not see the advantage of putting the fund managers “under added pressure” by telling shareholders how they have performed.

While some shareholders may disagree with that approach and would like to know how the managers are performing, the one thing the vast majority will no doubt want to continue is a rising dividend: Alliance Trust boasts a track record of 52 consecutive years of income growth.

To keep the record up last year Alliance Trust dipped into reserves, but Baker is keen to stress this is nothing to be concerned about. “If we took the same amount from the reserves every year, it would take 25 years before the pot was exhausted. There’s over £100 million in reserve, so it is not something that remotely worries me at all. The progressive dividend policy will continue.”

He adds that the low overall net yield of the trust, at 1.8%, reflects the stockpickers he employs finding high-yielding stocks expensive in general. However, if the level of natural income generated by the portfolio remains low in future years, Baker says he could always introduce a manager to focus purely on income.

Overall, Alliance Trust is making progress, and the multi-manager structure seems a good fit with its retail investors as it allows them to access a collection of fund managers investing in particular ways different from the ways they normally manage money. An added bonus is that some of the fund managers Alliance Trust employs cannot be accessed by UK investors elsewhere.

In addition, the low ongoing charge, 0.65% a year, stacks up well against its two biggest multi-manager trust rivals (see below for further analysis). Compared to open-ended multi-manager funds, where charges typically range from 1.5% to 1.75%, all three are much cheaper.

Ultimately, though, whether a fund is deemed cheap or expensive, the ultimate proof is in the performance pudding, and in Alliance Trust’s case the jury is still out on whether “best ideas” from these eight fund managers will translate into index-beating returns on a consistent basis. If this is achieved it will help attract a new generation of investors – something it and other investment trusts need to achieve in coming decades in order to survive.

How the two big rivals compare

F&C IT

F&C celebrated its big 150th birthday last year and with it came a name change, relegating ‘Foreign & Colonial’ to the history books. Paul Niven, who took over in 2014, has proved himself a worthy successor to Jeremy Tigue. The trust makes use of internal managers, but also draws in external managers, notably HarbourVest and Pantheon for the trust’s private equity exposure. According to broker Winterflood, on a five-year view its net asset value performance has been broadly in line with the FTSE All World index benchmark, but with lower volatility. The ongoing charges figure is the same as Alliance Trust’s at 0.65%.

Witan

Since the appointment of Andrew Bell in 2010, Witan’s performance has markedly improved, outperforming its benchmark in seven of those years; but last year was one to forget, with its net asset value return falling 8.4% versus a 6.5% decline for its benchmark.

Bell has made sweeping changes to make Witan more actively managed. Like Alliance Trust, some of the 10 external managers are familiar names such as Artemis and Lindsell Train, whereas others will be less familiar: Lansdowne Partners and Pzena. Bell also runs his own segment of the portfolio, which comprises around 10% of assets. The ongoing charge is slightly higher than its two rivals, at 0.75%, and there’s also a performance fee.

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