Alliance Trust Savings: Change of Ownership
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11 June 2020 Alliance Trust

Portfolio update

Global equities have staged a dramatic recovery since the bottom of the market on March 23 when there was widespread panic about the potential impact of the Covid-19 pandemic. The Alliance Trust portfolio has rebounded, too, recovering two thirds of its losses through to the end of May.

Following outperformance in April and May, the portfolio is now down 7.1%% for the year to date. The biggest contributors to performance since the start of the year have included Amazon, which is benefitting from booming sales of home-delivered goods during the lockdown. The biggest detractor year-to-date has been Airbus, which is suffering from the decline in air travel, although Veritas is sticking with its position in the stock. With net cash of £30bn euros, Veritas believes Airbus can withstand current pressures on its balance sheet and go on to prosper over the next five years.

Despite the recovery, the portfolio is still down more than our benchmark, the MSCI All Country World Index, since January. It has returned -2.7%, but our investment manager, Willis Towers Watson (WTW), is confident that it is well positioned to deliver higher returns than the market over the long term.

However, further short-term setbacks can be expected in the market unless a vaccine or viable treatment for Covid-19 is developed sooner rather than later. As lockdown measures are gradually being relaxed and government support schemes for individuals and companies are wound down over the coming months, WTW believes the damage done to both by the collapse in economic activity could well lead to a U-shaped recovery, rather than the more optimistic picture seemingly priced by the equity market, buoyed by fiscal and monetary stimuli.

To protect future returns through this environment and manage overall portfolio risk, WTW has been re-allocating capital between the portfolio’s stock pickers. It has rebalanced  away from those whose contribution to risk increased in the recent market environment, such as Lyrical, Jupiter and River and Mercantile, which all focus on value and often smaller-cap stocks, that have been quite volatile, and giving more capital to Veritas, GQG and Sustainable Growth Advisers, which tend to buy more stable, higher quality large-cap growth companies with clearer earnings outlooks in the current environment.

Changes in Manager Allocations


































The managers themselves have also been quite active in the past few months. Portfolio turnover is typically between 2% and 4% per month but it picked up materially through March and April, when the best part of 20% of the holdings changed as the stocks perceived as most vulnerable to the crisis were sold and replaced with new, more attractively priced opportunities. The pick-up in turnover was also influenced by WTW’s changes to manager allocations.

Among the stocks that have been sold out of the portfolio are the cruise operator Carnival, some banks, such as Bank of America, and Credit Agricole, and the oil major ENI. The new purchases include Siemens, Dell, Fleetcor, a payments company, and the online travel company Bookings Holdings.

The swap of Carnival for Bookings Holdings demonstrates that the stock pickers are carefully sifting through individual companies and assessing their earnings power through detailed research rather than simply adopting a top-down industry or sector view of the market.

River and Mercantile, which traded the two companies, took the view that cruises will take longer to recover than other holiday options and that Carnival’s weak balance sheet is vulnerable to an extended period of weak demand whereas Booking Holdings has a strong balance sheet and a flexible costs base. River & Mercantile also believe that Booking Holdings can gain market share during the downturn and was attracted by the stock halving in price during the indiscriminate market sell off in March.

ENI was sold because of the uncertainty surrounding the cash flows and dividends from oil stocks, as well as climate change potentially leading to asset impairments, and Bank of America and Credit Agricole were both sold on accelerated declines in global interest rates combined with uncertainty about the economic backdrop and future non-performing loans.

Siemens was added to the portfolio because of its global scale, diversified industry exposure and strong balance sheet which puts it in position to see through the current uncertainty and benefit when economies get back to normal.  Dell has similar attractive characteristics. It is the world’s largest, end-to-end provider of IT infrastructure, software, and services, with over $90 billion in annual revenues. The company ranks #1 in multiple major categories, including servers, storage, PC revenues, and virtualization software.

Historically, Dell was focused on PCs and servers, but in 2016 the company diversified its business with the acquisition of EMC Corporation, making it the largest enterprise storage system provider in the world. EMC also included an 80% stake in VMWare (VMW), the largest provider of virtualization software. The combination of PCs, servers, storage, virtualization, and VMWare’s cloud services allowed Dell to become a one-stop-shop for its customers’ biggest IT purchases. Dell’s scale provides significant advantages, with over $65 billion in annual supply chain procurements, the largest sales force in the industry, and significant cross selling synergies.

The robust strength of companies such as Siemens and Dell, purchased at attractive valuations, should allow the portfolio to reap the benefits over the longer term.

WTW is also guarding against the risk of another market correction by reducing the level of gearing. There was an initial minor increase in gearing levels following the steep market falls, with gearing reaching the mid-range set by the Board. Gearing was allowed to drift up passively, in order to benefit from the rebound in markets which followed. In the later part of April, gearing was gradually reduced to the lower end of the range set by the Board to reflect WTW’s view that, despite the recovery seen in the equity market, a significant level of uncertainty remains about the impact of the pandemic on the global economy. Although the market has continued to advance since then, WTW remains wary.


The opinions expressed are those held by WTW at date of issue and are subject to change. Past performance is not a reliable guide to future returns. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office, River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC gives no financial or investment advice.

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