9 May 2018

By Max King, MoneyWeek. First published 4 May 2018.

Alliance Trust turns over a new leaf

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.

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