27 April 2018

By Laura Suter, The Daily Telegraph. First published 20 April 2018.

Investing - Fund of the Week

Alliance Trust launched 130 years ago, but has undergone a total transformation in the past year.

The trust sold off the asset management business it owned (which also ran the fund’s money), its chairman and chief executive left, and it appointed eight fund managers to run the portfolio.

The changes came after “activist” investor Elliott Advisors built up a large stake in the fund and publicly demanded change to turn around performance at the ailing trust.

The new fund managers – selected by David Shapiro of investment consultant Willis Towers Watson – each run a concentrated portfolio of their “best ideas”, investing in around 20 stocks.

Trust chairman Lord Robert Smith of Kelvin and Mr Shapiro sat down with Telegraph Money to talk about how the first year has gone.

How has the first year of the new portfolio management been?
Lord Smith: This has been quite a year. We’ve gone completely back to our roots. Performance has been good; we said we’d target 2 percentage points above the index and we have done that. We’ve increased the dividend by 3pc, the 51st year of increased dividends – that’s something we’re committed to.

How do you pick managers?
David Shapiro: When we pick managers we want them all to be specialists in different areas. There are 187 stocks in the trust, and the most overlap we allow is two stocks being held by different managers. They are a mix of global managers – some are based abroad like Bill Kanko at Black Creek, which doesn’t have a UK presence.

Even where it’s a manager available in the UK, like Hugh Sergeant at River and Mercantile, this is the only way you can get his 20-stock portfolio. LS: Our investors could not get these managers directly. This is unique.

How do you decide how much each manager is allocated?
DS: It’s not an even split – it’s a bit like picking your favourite children, it’s very, very difficult.

We don’t know whose style will be in favour in any month, so instead of giving equal amounts of money, we give them an equal amount of risk. If a portfolio is more volatile we give them slightly less money, even though we love them just as much.

When we get money into the fund or are shrinking, we take away money from the best performing manager and give it to the worst performing manager.

The discount reached 13pc. How did you reduce it?
LS: There was quite a large discount two years ago. It now hovers around 5pc and we’re pretty comfortable with that.

We will manage the discount around that level. I’d like to think that once people see the first year of performance, they will want to invest, and if we get to a small premium we may issue more shares and grow the trust.

With many underlying managers, does the trust cost more?
LS: We have said the management fee won’t go above 0.65pc and it’s currently 0.62pc.

DS: That covers everything. The nearest comparable for a multi-manager fund is Witan, which is 0.75pc plus whatever performance fees they’re paying their managers.

We can get the underlying managers more cheaply, as they see this as long-term money and value the relationship with us.

You still own the investment shop business Alliance Trust Savings – how has that performed?
LS: We have had complaints about the platform. There have been performance issues. This year the board decided it wasn’t as valuable as we thought, so we have taken a write down [the trust cut its valuation of ATS from £61.5m to £38m].

Because of the performance issues they put a lot of extra people on it to make sure the performance improved, but in doing that they ran up quite a lot of costs, so they will show a loss this year. There is no sale process at the moment.

Do you both have money in the trust?
DS: Yes. I do and my wife does – all the team at Willis Towers Watson own it.

LS: I own 18,000 shares, well above the minimum required of me as chairman.

How confident are you that you can continue to grow the dividend?
LS: If we had zero dividend income from investments we’d still be able to pay the dividend for two years, from the reserves we keep.

In focus: Ryanair
Pierre Py and Greg Herr at FPA, one of the underlying fund managers, explain why Ryanair will soar

Ryanair is Europe’s largest passenger airline. A temporary shortage of pilots for its schedule last autumn led the company to cancel an unprecedented number of flights and pledge to boost pilots’ compensation.

Since then, the company has entered negotiations and reached agreements in some markets.

Labour flare-ups in certain other markets will likely persist as discussions continue. However, lower staff costs are only a portion of Ryanair’s cost advantage versus competitors.

Growth opportunities for Ryanair also appear compelling as fleet additions allow increased penetration of existing markets, mainstream airports are considering low-cost carrier terminals and employee agreements potentially open new markets in France and Scandinavia.

Ryanair continues to have a massive cost advantage against all competitors, not only the bloated legacy airlines but also the other low-cost providers.

This contributes to making the company’s core business model very powerful and extremely difficult for anyone to replicate or fend off. Despite recent challenges, management has firmly established itself as best-in-class. This is underscored by the company’s attractive profitability, returns on capital, high cash conversion and net cash balance sheet.

The business shows financial strength: fleet additions, for example, are mainly funded through cash flow, rather than financed, and net debt remains modest. Ryanair isn’t your typical airline and we see long-term value.

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