Sceptics were wrong about the fund’s new strategy – the performance speaks for itself.
When Alliance Trust announced its new investment strategy last year, after years of disappointing performance, many commentators, including me, were sceptical. Handing the job of selecting the fund managers over to institutional investment consultants Willis Towers Watson (WTW) seemed a cop-out by the board, and a recipe for mediocre performance. Last year’s performance showed how wrong we were.
In 2017 Alliance Trust’s net asset value (NAV – the value of the underlying portfolio) return was 18.5%, while the share price returned 19.2%, relative to a 13.8% sterling return from the MSCI All Countries World index. From the start of April 2017, when WTW took over the management, to the end of February 2018, the portfolio’s performance, before costs, was 3.1% ahead of the index. With a market value of £2.5bn at 738p, the shares yield 1.8% and trade on a 6% discount to NAV, well below historic levels.
A formula that works
That the fund had turned over a new leaf should have been obvious a year ago. The new chairman, Robert Smith, has a well-deserved reputation for shrewdness and is supported by a highly capable board. By the time WTW was appointed manager of Alliance Trust, it had over ten years’ experience advising a large client on a very similar basis, outperforming the MSCI index by a compound 3.8% per year.
The WTW formula is to employ eight complementary managers, each responsible for a focused portfolio of up to 20 stocks, except for the emerging-market specialist, who is allowed 50. There are occasional overlaps, but these will be unusual if the right managers have been chosen, says co-manager David Shapiro. Many would regard the resulting portfolio of 200 as a long one but, as Shapiro says, “we have been doing it this way for ten years and it works”.
WTW selects its managers from a vast databank, which includes not just funds in the public domain, but also those reserved for large institutional clients. Typically, WTW has known these funds for five to ten years before recommending them to Alliance. Its scale – £2.5bn managed for Alliance Trust plus $3.5bn in the institutional fund and $2bn for a new client – means that it can obtain the most competitive terms, keeping costs down. That said, Shapiro intends to limit each manager to $1bn of assets, lest liquidity (ease of buying and selling shares) becomes a problem.
The result is a global portfolio with a modest tilt to small- and mid-caps. The geographic tilts are small; 3% below the MSCI index in US stocks and Japanese companies balanced by higher-than-index weightings in Asia ex-Japan and emerging markets. Sector allocation appears more pronounced, with nearly a third of the fund in information technology, but relatively light exposure to financial and industrial companies.
Performance overexcitement
WTW’s role is “to select and monitor the managers, control risk, monitor sector and country exposure and ensure that stock selection drives the added value”. As a former equities manager, Shapiro is familiar with many of the companies and able to check up on the rationale for each holding. The overlap with the MSCI index is just 21%, so the performance is mostly determined by the choice of companies rather than by geographical allocation or currency exposure.
This doesn’t make Alliance Trust the most exciting of funds, but the Dundonian investors who have formed the backbone of the trust for 130 years have never been keen on excitement. Solid performance, a rising dividend and low costs (0.65% per year) are what they look for and if WTW continues to deliver performance 3% ahead of the market per year, that 6% discount won’t remain around for long.
Activist watch
Activist investor Elliott Advisors has bought a controlling stake in bookshop Waterstones. The chain will sit within Elliott’s private-equity business, “raising the possibility of another private sale or a stockmarket flotation in the medium term”, say Jonathan Eley and Cat Rutter in the Financial Times.
Elliott “declined to comment on its intentions” for the chain, other than saying it would support Waterstones’s managing director James Daunt, who will stay on as chief executive, alongside his leadership team. The fund will also refinance the company, whose latest accounts showed £132m owed to Lynwood, the investment vehicle of its previous owner Alexander Mamut. Waterstones reported operating profit of £26.6m in the year to April 2017.
Short positions… managers risking their own money
• RIT Capital, the investment trust that runs money for Lord Rothschild and his family, has topped an annual list of investment trusts where managers and the board have significant stakes in their own funds, says Laura Suter in The Daily Telegraph. The family has invested £336m of its own money in the trust – a large proportion of the £3bn portfolio. RIT has delivered strong performance over the past ten years, with share-price growth of 90.8%, compared with 75% for its benchmark index.
Close behind RIT in the list, which is compiled by broker Canaccord Genuity, sit Tetragon, Apax Global, and JZ Capital Partners, which all have managers with more than £100m of their own money invested in the trusts. The managers of the popular £6.5bn Scottish Mortgage investment trust have a £82.9m stake in the fund. Shares in Scottish Mortgage have gone up 334.7% over ten years, relative to 159.4% for the FTSE All World index.
• Gore Street Energy Storage, the investment company striving to become the UK’s first listed battery fund, has reduced its fundraising target to £35m from £100m, and lowered the minimum amount needed to proceed from £75m to £30m, says Gavin Lumsden on Citywire. Early last month the company extended its initial public offering (IPO) by three weeks to give it time to meet more investors. If the IPO fails, investors in the offer for subscription and intermediaries will get their money back, says Gore Street.