Alliance Trust: April 2024 investment trust update

• Willis Towers Watson hunt for what they believe to be the best stock pickers and blend them together in this trust

• The trust’s Investment Committee is supported by 130 analysts and portfolio managers

• The trust’s impressive dividend record continued after increasing for the 57th consecutive year

How it fits in a portfolio

Alliance Trust aims to grow an investment and provide a rising income over the long term by investing in companies from around the globe. Larger companies from developed markets are the primary focus but it also invests in higher-risk smaller companies and emerging markets.

Historically, the trust invested in a range of different assets alongside company shares, such as bonds, mineral rights, and private equity. Today it adopts a multi-manager approach, which means portions of the trust are run by different fund managers, and it’s solely focused on shares. This means there's plenty of diversification on offer. The trust could be used for income or to bring international diversification to a UK-orientated portfolio.

Manager

This trust is managed by 10 fund managers, most of which are not accessible for individual UK investors. Each manager creates a portfolio of approximately 20 companies, from wherever in the world they choose. They each have their own strengths, styles and areas of focus which are carefully blended together to create a diversified investment trust.

The managers are selected by the Investment Committee at Willis Towers Watson. The Committee is chaired by Craig Baker, Global Chief Investment Officer, who is supported by co-managers Stuart Gray and Mark Davis. The team can also tap into the expertise of around 130 analysts and portfolio managers from across the globe.

Process

The Investment Committee believes that the majority of stock pickers outperform with their highest conviction investments but hold back returns with their smaller holdings. That’s why they only let most of their underlying managers invest in their 20 best ideas. This number is big enough to spread risk and is also a manageable number of companies to keep on top of.

To whittle down a universe of over 1,600 managers globally, the team conduct detailed analysis to ensure they meet their criteria. Managers must possess a competitive advantage and be able to maintain this edge and continue to do well over the long term. The most important aspect is the people themselves. That’s why they spend a great deal of time understanding their motivations, experience, and who’s influenced them throughout their careers. The team also consider how these managers are aligned with their investors, whether that be through equity in the business they work for or a significant co-investment.

Information is widely available so it’s critical for them to understand how these managers are synthesising it better than others. Whilst the number crunching and length of their track record is important, their judgement is largely made through their qualitative work. Their dominant market position means they get great access to meeting stock pickers, their research and are able to sit in on company meetings. This work is ongoing, and they will meet with managers numerous times before taking a view.

Currently they have 10 different managers whom the Investment Committee blend together in the trust, ensuring there isn't too much risk at a company, sector, or geographical level. They also want to maintain a balanced portfolio in terms of investment styles.

North America accounts for roughly 58% of the trust making it the largest country allocation, although this is less than the benchmark. In contrast, they invest more in Europe, particularly the UK. Sector-wise, the managers find most opportunities within technology, financials and industrials.

In the past financial year, the team have added a position in Dalton Investments. This was funded from lowering exposure across other fund managers that had been performing well. Dalton is a value focussed manager who specialise in investing in Japan. They tend to focus on smaller and medium sized companies that are trading below their true value. The team believe that the outlook for Japan is strong with improving corporate governance that are more friendly to shareholders as well as low inflation and low interest rates. The team are hopeful that Dalton will allow them to capture some of those opportunities.

Some of the managers invest in smaller companies, emerging markets or use derivatives to help them invest, which all increase risk. The trust uses gearing (borrowing to invest) to try to boost returns. Gearing at the end of December was 7.1%. Gearing can also increase losses though, so it’s a higher-risk approach.

Culture

Alliance Trust was founded in 1888 and is a constituent of the FTSE 250 index. Today it’s managed by Willis Towers Watson (WTW), a large consultancy firm with over 45,000 employees across 140 countries. This is the first investment trust they’ve managed but WTW has invested this way for much longer on behalf of institutional clients. When selecting managers, they pay close attention to the underlying culture, alignment, and operational resource of the firms they work for.

ESG Integration

Although not an ESG trust, WTW ensure the underlying managers must have a demonstrable framework in place to identify and monitor environmental, social and governance (ESG) factors for the companies they invest in.

WTW allow the managers to manage this risk as they see appropriate as long as there is a suitable framework in place. In 2021, the board also set a target of net zero greenhouse gas emissions from the trust by 2050. Each asset manager that the trust uses must have also set a net zero target.

Cost

The net ongoing annual charge is 0.62%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA, the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Since WTW was appointed as manager in April 2017, the trust has outperformed the MSCI All Country World and other globally focused investment trusts. Over this period its share price has grown 106.73%* vs 102.74% for the benchmark and 76.82% for the AIC sector. Its Net Asset Value (NAV) also rose 104.04%. Remember past performance is not a guide to the future.

Over the trust’s last financial year to the end of 2023, its NAV increased an impressive 20.18% ahead of the benchmark which returned 15.88% and ahead of the AIC Global sector which returned 14.74%. The share price also increased 20.18% vs 14.74% for the sector.

The trust benefited from investing in a variety of styles and exposure throughout 2023, with the biggest contributor to performance being from their allocation with Vulcan Value Partners. Vulcan tilt towards a more value style of investing and look for companies they believe are cheap compared to their long-term value. Vulcan had strong returns from US technology and consumer companies Microsoft and Amazon but also from industrial company General Electric and private equity group KRR. The trust also benefited from a more growth style of investing with Veritas performing well. Veritas had strong returns from US tech companies Amazon and Alphabet but also benefited from strong performance of Safran, the French aerospace and defence company.

On the other hand, the portion of the portfolio managed by Black Creek and Jupiter failed to keep up with the market whilst GQG performed roughly in-line. Brazilian mining company Vale S.A was a stock owned by GQG which didn’t perform well. GQG have typically been successful at knowing when to swap between owning mining and energy companies to owning more technology orientated companies however, on this occasion they got it wrong with Vale. Japanese industrial company MISUMI also underperformed and this was owned by Black Creek. Black Creek is a more value orientated manager and purchased MISUMI for what they believed to be a good price. Unfortunately, the share price has continued to fall but they still believe it’s a quality company with good long-term prospects.

The total dividend per share for the year to 31 December 2023 was 25.2p, which is a 5% increase on the previous 12-month period. This trust is an AIC ‘dividend hero’ having increased its dividend for the 57th year in a row. At the time of writing the trust trades on a 4.83% discount and on average over 2023 the trust traded on a discount of 5.18%. The trust has a dividend yield of 2.05%, although remember yields are variable and aren’t a reliable indicator of future income.