Alliance Trust switch to multi-manager approach is paying off

On the eve of the three-anniversary of the investment trust’s change in structure, Kyle Caldwell talks to Willis Towers Watson’s Craig Baker.

The three-year anniversary of Alliance Trust’s switch to a multi-manager structure crops up at the start of April, and the verdict is: so far so good.

In an interview with Money Observer last June, manager Craig Baker of Willis Towers Watson said the first two years in the new structure were “too soon” to reflect on performance, and asked instead to be judged over a minimum three years. On that front, Alliance Trust has a target to outperform the MSCI All Country World index by 2% a year, net of costs, over rolling three-year periods.

Results released by Alliance Trust earlier this month covering the period up to the end of 2019 indicate this target looks a stretch too far, but nonetheless its benchmark-beating performance has impressed. Since April 2017, the total shareholder return stands at 28.9%, while the net asset value return is 27.1%. Both outperform the MSCI All Country World index, which over the period managed a total return of 25.5%.

Figures for 2019 also make encouraging reading, with the trust’s total shareholder return at 24.3% versus 21.7% for the index. The trust also raised its dividend for the 53rd year on the spin.

“Given how much of a tough time it has been for active fund managers since we took over management [of the] trust I view it as a job well done. In terms of the three-year target, I think if we are anywhere near that then it would be phenomenal performance,” says Baker.  

To put this in perspective, Baker points out that in 2018 and 2019 the vast majority of shares underperformed the MSCI All Country World index. He adds that the performance of the overall index was heavily influenced by a small number of very large stocks – primarily the US tech giants.

In turn, Baker adds, this has made the period a challenging environment for active fund managers. Overall, the managers Baker has tasked with running a “best ideas portfolio” have come up trumps. Each manager’s portfolio typically contains around 20 stocks. Six of the original eight underlying managers have outperformed since April 2017, with an additional stockpicker – Vulcan Value Partners – appointed during 2019, which increased the number of “value” managers to three.

Baker adds: “Stock selection has been driving performance, and we think the active managers selected have delivered. From a risk management standpoint we would be concerned if all of the managers were outperforming, as this would mean we have a style bias.” 

In 2019, Alliance Trust strengthened its approach to responsible investing by appointing external experts Hermes EOS (Equity Ownership Services). Baker describes the hire as an extra layer of due diligence, given the managers do their own analysis on Environmental, Social and Governance (ESG) factors as part of their processes.

He adds: “Hermes gives a separate ESG assessment and challenges the managers in certain cases. Hermes also suggests how to vote on governance matters, and if the manager chooses to go against what’s been proposed, they have to tell us why.”

While it has not placed any ethical or value-based restrictions on the types of stocks in which its managers can invest, Alliance Trust has prohibited investment in armaments.

Overall, analysts are positive about how Alliance Trust’s move to a multi-manager structure is faring. Numis describes the performance over the period from April 2017 to the end of 2019 as “solid”.

It says: “We believe the concept of investing in the top 20 stock picks from a range of leading managers via a low-cost vehicle is appealing (ongoing charges figure of 0.64%). The vehicle is now simpler for investors to understand, being an investment portfolio following the disposal of other non-core business lines including Alliance Trust Savings.

The investment trust research team at Investec Securities have also given the performance the thumbs up.

Analyst Alan Brierley says: “Alliance has undergone a dramatic transformation in recent years, and the move from a somewhat woolly process to a unique and dynamic one is a critical development.”

He adds: “The active share is 80% and stock selection has been, and is expected to be, the key driver of superior returns.”