2018 INTERIM REPORT
Chairman’s Statement
I am pleased to report the steady progress of our new investment approach. For the first six months of 2018, the Trust’s Total Shareholder Return (TSR)*, Net Asset Value (NAV) Total Return* and equity portfolio return* were 1.1%, 2.9% and 2.9% respectively, compared to our benchmark the MSCI All Country World Index (ACWI) which returned 2.3% over the same period. The NAV outperformance was driven by returns from the global equity portfolio constructed by Willis Towers Watson (WTW).
Since WTW's appointment in April last year the equity portfolio has delivered a return of 12.9% and the Trust a NAV Total Return of 12.3%, compared to the MSCI ACWI’s of 10.1% over the same period.
DIVERSIFIED HIGH CONVICTION APPROACH
We are encouraged by WTW’s “all-weather” approach to investing in global equities, which is designed to outperform regardless of the dominant drivers of returns in any given period. Tried and tested over a number of years in the institutional market, it has stood up well to a variety of market conditions. The Board is confident that it will deliver Alliance Trust’s long-term goal of achieving consistent outperformance at a competitive cost, while maintaining our progressive dividend policy.
A number of academic studies have shown that active equity managers add most value through their high conviction positions. Yet, the performance of such portfolios can also be highly volatile. WTW has mitigated this by diversifying risk across several managers with different styles, and this has delivered low volatility over the period since WTW's appointment.
As previously announced we are reviewing the wording of our Investment Objective so that it better reflects our new investment approach. The revised wording will be proposed for shareholder approval at our next Annual General Meeting (AGM).
“We are encouraged by WTW’s 'all-weather' approach to investing in global equities, which is designed to outperform regardless of the dominant drivers of returns in any given period. Tried and tested over a number of years in the institutional market, it has stood up well to a variety of market conditions.”
DISCOUNT CONTROL
The discount has remained within a relatively narrow range, despite a significant reduction in share buyback activity. We have purchased just over 7.6m shares since January at a cost of £55m. Since the AGM in April there have been few buybacks and the discount has remained in the 4.7% to 6.8% range suggesting that supply and demand have achieved a level of equilibrium. We will, however, continue to monitor the discount closely and, as before, will consider buying back more shares if the discount shows signs of widening noticeably.
CONTROLLING EXPENSES
While maintaining our commitment to keep our Ongoing Charges Ratio* below 0.65% at the Trust's current size, ongoing administrative expenses have risen in the first half of the year by £0.9m. The higher ongoing costs reflect the new investment and administration arrangements that have been in place for the full six months this year and an increase in marketing spend.
IMPROVING SHAREHOLDER COMMUNICATION
As part of our ongoing plans to improve shareholder communication we are planning to provide shareholders with an opportunity to meet a number of our managers in London in October. We are also organising professional investor roadshows around the regions and providing content on our website, which was awarded Best Website for an Individual Investment Company in this year’s Association of Investment Companies (AIC) Shareholder Communication Awards. We are also proud to have received the award for Best Factsheet.
DISPOSAL OF NON-CORE ASSETS
We sold the shares we received from Liontrust Asset Management Plc (Liontrust) in January and redeemed our holdings in three Liontrust funds in April. The sale of one of our private equity investments was agreed just after the period end and progress is being made on the sale of other private equity investments. We are continuing to consider the sale of our Mineral Rights. In April we received a further 1,015,198 Liontrust shares as part of the consideration for the sale of Alliance Trust Investments. These shares are subject to a 12 month lock up.
INVESTMENT IN SUBSIDIARY COMPANY
Over the period Alliance Trust Savings (ATS) has delivered an improvement in both customer service and operational performance. We have received a number of expressions of interest in ATS and are currently considering whether a change of ownership would be in the interests of Alliance Trust shareholders and ATS’ customers and staff. Discussions with interested parties, each of whom envisage maintaining or growing ATS' presence in Dundee, are at an early stage and there can be no certainty that the Board of Alliance Trust will decide to sell ATS.
PROGRESSIVE DIVIDEND POLICY
The Board has declared a second interim dividend for the year ending 31 December 2018 of 3.389p per ordinary share payable on 1 October 2018 to shareholders on the register on 7 September 2018; the ex-dividend date is 6 September 2018. This is a 3% increase on last year. Although the equity managers do not explicitly target higher yielding investments, they are expected to generate sufficient income through the cycle to allow us to pay an increasing dividend. In the short term there is likely to be a shortfall in income generated from the portfolio and the Board will therefore use the Trust’s healthy revenue reserves to build on our record of paying an increased dividend every year for over 50 years.
UNCERTAIN MARKET OUTLOOK
There will always be periods of volatility when the focus of equity markets shifts away from company fundamentals, but we believe WTW’s approach to investing is robust. This should stand shareholders in good stead for generations to come, irrespective of short-term market conditions.
Lord Smith of Kelvin, Chairman
26 July 2018
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