Individual Investors
Please select this option if you are an individual investor. The value of investments may go down as well as up and you may get back less than you originally invested.
proceed
Professional Investors
The information contained in these pages must not be used or relied upon by private investors. Please select this option only if you are a professional investor.
proceed
Alliance Trust Savings: Change of Ownership
Please note that, as of 28 June, Alliance Trust Savings (ATS) is owned by Interactive Investor Limited. If you have any questions about the sale of ATS and what it means for you, please visit ATS’ website*. If you’d like to stay up to date with the Trust’s performance or any news, please sign up below.
Visit ATS website Sign up
By clicking on the 'Visit ATS website' link above, you will be taken to a third party website.

*The brand names ‘Alliance Trust Savings’, ‘ATS’, ‘AT Savings’ and the ‘Alliance Trust Savings’ logo which may appear on ATS’ website are owned by and used with the permission of Alliance Trust PLC, being the previous owner of ATS.

Fund Manager Outlooks for 2022

14 December 2021 Stock Stories, Performance, About Alliance Trust Alliance Trust

It’s the time of year to ask our stock pickers for their views on the year ahead, what they may have learnt from past mistakes and where they see the most exciting opportunities for the Alliance Trust portfolio.  

 

WHAT DO YOU EXPECT THE BIGGEST CHALLENGE WILL BE IN 2022? 

Bill Kanko, founder and president, Black Creek Investment Management 

As we near the end of 2021, the global economy has recovered significantly from the shutdowns imposed by Covid-19, albeit with shortages in various products and hiccups in supply chains. Material costs have risen and labour costs seem set to rise as well. With current nominal interest rates well below the inflation numbers, a key challenge will be to determine whether this jump in prices is cyclical and temporary or ongoing. Higher interest rates would be negative for both bond and equity markets. Low interest rates have also caused bubbles to appear in some sectors of the market.  As rates rise, these bubbles may burst. We try to steer clear of bubbles.  

Ben Whitmore, Head of Strategy, Value Equities, Jupiter  

We simply don’t know the answer to that. As 2022 progresses we will spend our time looking at the individual companies that we are invested in.  

Andrew Wellington, CIO, Lyrical 

The biggest challenges in 2022 will probably be the biggest challenges of 2021, namely, supply chain disruption and inflation. As the Global economy has reopened, demand for goods and services has returned. Companies are having a difficult time sourcing everything they need to meet that demand, and with those supply shortages we have seen prices rise, driving inflation. The supply chain and inflation issues are difficult challenges for any management team. That said, for most of the companies in our portfolio, the net result of these challenges has been positive to the bottom line, with higher prices more than offsetting lower volumes and increased costs.  

Hugh Sergeant, CIO of Equities, River and Mercantile 

I expect one of the biggest challenges in 2022 will be interest rate rises, as monetary policy starts on a path to normalisation. This could reduce the return to equities next year but this should be positive for the Value equities that we invest in, as rising rates are more supportive of shorter duration value stocks than longer duration growth and quality investments.  

Michael Sramek, Senior Portfolio Manager and MD, Sands Capital  

Big picture, we continue to believe that technology and demographics are powerful, long-term disinflationary forces. However, it’s possible that we see an overreaction by the Fed and a policy mistake, similar to 2018. The risk of this might be higher if Jerome Powell is replaced, as the new Fed chair might feel pressure to “do something.”  

While this could result in short-term equity market volatility, we don’t believe this would erode the long-term investment cases for any of our businesses. There, we believe competition, saturation, and regulation are the biggest risks to monitor, and we believe our businesses remain in good shape. 

Rob Rohn, George Marchand and George Fraise, Founding Principles and Portfolio Managers at SGA 

The biggest challenge for the markets is likely to be slowing profit growth as the recovery of cyclicals normalizes.  

Andy Headley, Head of Global Strategies, Veritas  

The biggest challenge ahead is the general valuation of financial assets and the impact this has on the opportunity to find investments that will generate good absolute returns. Bond yields have been pushed to abnormally low levels (through policy decisions such as monetary policy and quantitative easing) which then impacts the valuation of all financial assets. While there are still some select opportunities, the valuation of many high-quality companies is not commensurate with earning high returns over the next five years. 

C.T. Fitzpatrick, Founder, Vulcan  

We have been working remotely since early 2020 and expect to return to the office in early 2022. This provides a wonderful opportunity to reconnect in person and reestablish our office culture but may also provide some challenges during the transition back into the office. On the portfolio side, the businesses we own have experienced historically strong value growth in 2021 and we expect that to continue in 2022. That said, the future is uncertain which is why we insist on investing with a margin of safety.  

Simon Denison-Smith & Jonathan Mills, Co-founders and Co-portfolio Managers at Metropolis Capital 

Increased inflation will probably be the biggest global challenge in 2022 so it’s critical that companies have the pricing power to pass on any increased costs. We believe our portfolio companies are well placed in this regard.  

Rajiv Jain, Chairman and CIO, GQG  

We believe the biggest challenge in 2022 will be when the emergency policy responses from both governments and central banks enacted at the depths of the Covid-19 crisis eventually subside. Specifically, the unintended consequences of said policy responses in the form of inflation and supply chain bottlenecks. With valuations elevated relative to historical standards, most acutely in the tech/software space, the margin for error is slim for many long duration assets if inflation is indeed more than transitory and rates rise.  

 

WHICH EXPOSURES THAT YOU OWN IN THE ALLIANCE TRUST PORTFOLIO ARE YOU MOST EXCITED ABOUT AND WHY? 

Bill Kanko, founder and president, Black Creek Investment Management 

We own a broad range of companies and industry exposures in your portfolio.  We are heartened by the fact that a good portion of the portfolio companies sell at attractive multiples relative to the overall markets.  It remains incumbent on us to identify true growth businesses in what might be a slow-growth economy for the next five to ten years.  

Ben Whitmore, Head of Strategy, Value Equities, Jupiter  

The portfolio in aggregate is very lowly valued but crucially we have not had to sacrifice quality to achieve this.  On our preferred measure which uses the average earnings over the last 10 years, it is trading on a just over 10x. this is at a discount of 70% to the US stock market.  However, we have not had to sacrifice quality.  The return on operating assets (a widely accepted measure of quality) is similar to the index.  This combination, and the extent of the poor performance for our style of investing, makes  us quite optimistic.  

Andrew Wellington, CIO, Lyrical 

Our concentrated portfolio is still well diversified, with no outsized exposure to any one stock, industry, or sector. However, one thing our stocks have in common is that we believe they are all significantly undervalued, and so “value” is our greatest exposure. We are always excited by our exposure to value, but we are more excited than usual now. Value stocks were broadly out of favour for a couple of years, making them much cheaper than normal.  Then, after bottoming in March 2020, value stocks began performing again.  We believe value stocks should continue to perform for many more years to come, as in the past the performance runs have lasted over eight years on average, and we are not even two years removed from the bottom.  

Hugh Sergeant, CIO of Equities, River and Mercantile 

We are high conviction regarding all the stocks in the portfolio, especially as our Value and Recovery approach has yet to really benefit from the post Covid pandemic rally. Shares such as Walt Disney and Whitbread will benefit from what should be the first pandemic free year in 2022, Lloyds and Citigroup from a favourable environment for lenders especially as they will be able to make a higher margin as interest rates move upwards, and Baidu and Prosus from a re-rating of China exposed stocks and a return to attractive levels of growth.  

Michael Sramek, Senior Portfolio Manager and MD, Sands Capital  

We continue to be excited about how digitalization is shaping the world, and in turn, creating value-creation opportunities for selective growth investors. While most market participants understand that the world is changing, we believe they underestimate the magnitude and duration of growth that digitalization will enable.  

Andy Headley, Head of Global Strategies, Veritas  

We continue to believe that Charter offers extremely good value in a highly protected position – they pass 52m homes with cable and can provide high speed internet to these homes at very low incremental cost.  This makes them extremely difficult to compete against for the telco’s who have to install expensive fibre to offer an equivalent service.  We anticipate Charter will generate c.$70 / share of free cash flow in 2025 putting the company on a double digit free cash flow yield.  We are also excited about CVS where the company is in the middle of transforming itself from a retail pharmacy into a vertically integrated healthcare provider with health insurance, pharmacy benefit management, pharmacy and primary healthcare.  This combination should be able to deliver double digit EPS growth over time but is currently valued at only 12.5x 2021 earnings and 8.0x our 2025 estimate of earnings.  Others in the portfolio we think will deliver good returns include (but certainly not limited to!) Cooper Companies, Meta Platforms and Fiserv. 

C.T. Fitzpatrick, Founder, Vulcan  

Two of the largest positions in the Alliance Trust portfolio are Mastercard and Transdigm.  

We expect that Mastercard will continue to benefit from the transition to digital payments in a post-COVID world. Additionally, the pandemic-induced weakness in cross-border transactions should become less of a drag as people start traveling again.  

Transdigm supplies highly engineered, niche components to the aerospace industry. The vast majority of the company’s profits come from aftermarket sales. Transdigm’s management recently indicated that commercial aftermarket revenue should grow 20-30% in 2022.  

Simon Denison-Smith & Jonathan Mills, Co-founders and Co-portfolio Managers at Metropolis Capital 

As we run a concentrated portfolio of 20 holdings, we’re excited about all our exposures. Companies which we believe are currently offering some of the highest upside to our estimate of their long-term intrinsic value include Alphabet, Adidas, Berkshire Hathaway and Progressive Insurance.  

Rajiv Jain, Chairman and CIO, GQG  

From a portfolio perspective, on a select name basis we’ve found increased opportunities in the Energy sectors broadly across all of our strategies. After nearly a decade of underinvestment and subsequent lack luster returns, we believe that select names in this sector present strong a risk/reward opportunity given our view of favorable supply/demand dynamics moving forward. However, we’d like to clarify that we are not buying cyclical names, in this case Energy companies, because they are “cheap” but because of the forward-looking quality present in them given the backdrop of capacity constraints and robust demand. 

 

WHEN HAS YOUR PROCESS FAILED AND WHAT HAVE YOU LEARNT FROM IT/DONE TO ADAPT? 

Bill Kanko, Founder and President, Black Creek Investment Management 

From time to time we have individual stocks in the portfolio that lose capital, but luckily these are few and usually far between, and they are usually offset by a number of other “winners”.  These mistakes seem to occur because we underestimate the negative effect of the convergence of operating leverage with financial leverage. 

The far greater mistakes we make are those, as Warren Buffett likes to call them, errors of omission.  These are where we understand the business and, for whatever reason, choose not to buy them, only to have the stocks outperform for a very long time.  Selling good businesses too early also falls into this category.  One way we have adapted is to sometimes hold smaller positions in growth companies even when the valuation looks high to us.  

Ben Whitmore, Head of Strategy, Value Equities, Jupiter  

The process on average has a 59/41 hit rate winners: losers according to outside research on our longest running fund.  For any investment that doesn’t work we want to check that the process was followed and whether there was anything we could learn to inform us going forward.  

Andrew Wellington, CIO, Lyrical 

We have learned from our failures over time to refine our process to what it is today.  We have evolved our investment process to look for certain traits that give us the greatest chance of success.  One trait is value. If we can buy a business at a discount to what it is worth, we have a margin of safety in case things go wrong, and have a higher return if things go right.  Another trait is quality.  When we avoid low quality businesses, we avoid a lot of mistakes.  The last trait is analysability.  The easier it is to analyse and understand a business, the greater our chance of correctly estimating its true worth. Still, we will have had some failed investments. Bad outcomes are inevitable, because investing is about projecting the future, and no one ever gets that perfectly correct. While our process will never be perfect, it stands as the best way we know to invest.  

Hugh Sergeant, CIO of Equities, River and Mercantile 

Value Investors have often been too early to invest in attractively valued stocks, some of which can become ‘value traps’. When we developed our PVT Philosophy in 2006, we identified this as a key lesson learnt and ensured that we had a Timing element to our Philosophy and Process (Potential, Valuation & Timing). We look for share price technicals and profit revisions to have bottomed out before making a significant capital allocation and look to add to holdings as share prices respond positively to improving news flow. 

Michael Sramek, Senior Portfolio Manager and MD, Sands Capital  

We seek to create balance in our portfolios by owning both “duration growers” and “hyper growers.” Historically, sometimes our duration growers had similar economic exposures to our hyper growers, which lessened their diversification benefit. Now, we seek to own duration-growth businesses that have differentiated growth drivers from our faster-growing businesses.  

Rob Rohn, George Marchand and George Fraise, Founding Principles and Portfolio Managers at SGA 

Situations where more macro-oriented factors take precedent over the organizational strength and quality of a company can pose a headwind to our process.  In order to better take such forces into account, we instituted the man overboard drill process where the entire investment team comes together to share their perspectives on a situation and evaluate whether the situation has changed in a way that threatens our basic thesis for the company.  

Andy Headley, Head of Global Strategies, Veritas  

Our process is designed to deliver good absolute returns over the very long term through investing in high quality companies when they are attractively valued. Typically we seek to generate 12-15% annualised returns in our investments.  When the overall equity market appreciates at a much faster rate than the 12-15% annually we seek in our investments, we find that we typically underperform the overall equity market (while continuing to deliver high absolute annualised returns). Equity markets typically appreciate very fast when liquidity is abundant and there is a sense of greed (or fear or missing out) which we feel is evident today. We will not try to change our process to take advantage of the type of companies that do best in this environment (often highly speculative companies, growing fast in revenue terms but substantially loss making or marginally profitable). 

C.T. Fitzpatrick, Founder, Vulcan  

Because we follow a discipline and demand a margin of safety when we invest, in looking back, we regularly sell businesses too early. We are working as a team to navigate the line between conservatism and reality.  

Simon Denison-Smith & Jonathan Mills, Co-Founders and Co-Portfolio Managers at Metropolis Capital 

Our investment in Tesco in 2016 was not a success because we failed to anticipate the effect of new capital coming into the market from Aldi and Lidl. This had further second-order effects as it led to a price war among the large grocers.  This was a useful lesson and helped us to sell IWG/Regus (after enjoying excellent returns) because we saw the potential threat from We Work and other imitators just before they impacted IWG’s business.  

Rajiv Jain, Chairman and CIO, GQG  

The 4th quarter of 2020 was a difficult environment, broadly speaking, for all of our strategies on a relative basis. However, we think it’s important to separate process from outcome when analyzing this. We did underperform on a relative basis during the period but to categorize it as a time in which our investment philosophy and process failed would be a stretch, in our view. Our investment philosophy is rooted in building concentrated portfolios of high-quality businesses with sustainable earnings growth over a three-to-five-year time horizon. Our forward-looking quality bias seeks to invest in businesses with deep economic moats, broad headroom for growth, and companies strong enough to navigate adverse developments in any market environment. We understand that there will be short-term periods in which companies with these characteristics may underperform on a relative basis but strongly believe that they possess the ability to achieve our ultimate goal of compounding capital over the longevity of a market cycle. With that considered, if you look at what worked for the quarter you would not expect GQG to outperform. On the value/growth spectrum we typically range from 4-7 but Q4 was a quarter where 1-3 and 9-10 were the big winners.  

Admittedly, we would have hoped to do better in Q4 but the vaccine announcement in November caused a headline/event-driven move that we were not properly positioned for, which is always more clear in hindsight. However, we’d like to emphasize that we’re not in the businesses of trading ahead of headline risk itself since the outcomes and subsequent market reactions are inherently unknowable. In addition to being under allocated to higher beta names that worked well during the period, our portfolios were also impacted from idiosyncratic headwinds on a single stock name basis with hawkish rhetoric from regulators in China due to changing policy dynamics.  

With all of that considered, our consolation prize from the relative underperformance is the low volatility our portfolios exhibited during this period. Our monthly returns were in line with our YTD monthly average resulting in a low std dev and beta, which we believe over the long term helps drive superior risk adjusted returns. Although November 2020, and Q4 2020 more broadly, were poor relative performance periods for our strategies we would emphasize that one of the stronger relative performance periods for our strategy was in Q1 2020 during the month of March. We outperformed in the depths of the crisis when it really mattered and provided downside protection to our client’s capital. We also still delivered positive absolute returns during a period, Q4 2020, in which our strategy was not embraced by the broader market. The combination of providing downside protection in times of crisis, coupled with keeping pace in the subsequent recovery, allows us to compound capital over a full market cycle which is our ultimate goal. We believe that achieving this goal can be accredited to our forward-looking quality bias and anti-dogmatic approach to investing.  

Read more investment expertise
More from Alliance Trust