Six years ago, Alliance Trust (LSE:ATST) changed fund manager and strategy, moving to a multi-manager structure. Craig Baker, of Willis Towers Watson, which manages Alliance Trust, gives his take on how performance has fared, and why he thinks going forward there will be easier periods to beat the global index it measures its performance against.
Baker also tells interactive investor’s collectives editor Kyle Caldwell how he decides whether to hold or fold when a fund manager is underperforming, discusses some stock pickers switching out of value shares in favour of US tech, and provides his market outlook for the months ahead.
Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me Craig Baker of Alliance Trust. Craig, thank you for coming in.
Craig Baker of Alliance Trust: You're welcome.
Kyle Caldwell: We're six years on from Willis Towers Watson taking over Alliance Trust and the structure changing from a multi-manager approach. How would you assess performance has gone?
Craig Baker: So, since inception six years ago, as you said, we've outperformed the benchmark and we've outperformed the peer groups, whether that be the sector that we're in, the investment trust sector or the wider retail universe that includes open-ended funds.
But we haven’t outperformed by as much as we think we will do over the long term, or we hoped to do at the start of that. And really that comes down to the fact that it’s been a really tough period for a lot of that six years to beat the index over that full six-year period. The index, the MSCI All Country World Index, has been one of the best-performing portfolios that's out there, really because it's been concentrated on a small number of large technology companies that have driven markets over that full period. So, a tough period. If you look at the last three years, we've significantly outperformed and that's really from the nadir of the equity market fall following Covid. So, from those three years to the end of March 2023, we've outperformed the index by almost 2% per annum and we've outperformed the investment trust sector by about 5% per annum, and the wider peer group by about 4% per annum.
Kyle Caldwell: And in terms of performance, you have an aim of outperforming the MSCI All Country World Index by 2% a year over three-year rolling periods. As you've just mentioned, it's been a tough index to beat over the past six years because there's been a small number of winners, particularly the big US technology companies. So, looking forward, over the next three to five years, are you confident that you'll beat that index and achieve that target?
Craig Baker: Yes. So, as you say, the 2% per annum is ultimately what we think is achievable over the very long term, and it's certainly consistent with what we've been able to achieve in our accounts that have been in place for many years on the institutional side. So, I'd be confident about the ability to do that in the very long term.
You can never be fully confident over a particular three-year period. We wouldn't necessarily have expected it to be quite so tough in that first three years of us running the Alliance Trust portfolio. But when we look at where the returns have come from in our portfolio versus the index, we see a lot of latent value in the portfolio. A number of the companies in there have been producing earnings well above expectations and that hasn't necessarily yet been reflected in share prices.
But we know that over the long term it's the fundamentals that drive share prices. So, we sit here today confident that at some point that will come through in excess returns. And in the same way, there have been tough periods to beat the index for three years or more. There will be easier periods for three years or more to beat that index. So, on balance, yes, I'd be confident over the next three years, but certainly very confident over the long term.
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Kyle Caldwell: And when a fund manager is underperforming, what steps do you then take? Do you carry out a review and how would you decide whether to keep on investing with that fund manager, or selling?
Craig Baker: Yes, so we are constantly reviewing all the managers and it doesn't matter whether they've underperformed or outperformed. We’re challenging whether they've performed in line with how we would have expected, given their philosophy and approach and what's happened in markets. So, we're just as worried by a manager who outperforms in a period we would have expected them to do badly in, as we are in a manager who underperforms in a period we would have expected them to do well in. So, we're challenging that all the time.
Now, if we still feel comfortable that the manager has performed as we would have expected, but [they have] underperformed and we're confident that nothing's really changed in terms of the initial proposition of what we liked about the manager, then we would typically be giving more money to the managers who have underperformed in recent times and taking profits from the managers who have outperformed in recent times.
Kyle Caldwell: And in terms of investment style, some of the fund managers invest in growth stocks, some invest in value stocks - how much of an advantage is it being neutral?
Craig Baker: We think it's a big advantage. And the reason for that is that we think that you get a lot more returns per unit of risk, from stock selection decisions than you typically do from calling what style is appropriate in the market. And that's not to say that a manager with a strong style can't do well over the long term, they can. And of course, they will often be top of the charts for a period and then bottom of the charts for period. But if they're skilful, they could still produce good long-term returns. However, it tends to be a lot more volatile. And so, by blending managers who have got very different styles, if you can allow stock selection to drive everything, you can actually still get that significant outperformance over the long term, but with a much smoother ride through the period.
Kyle Caldwell: Over the past 18 months to two years, we've seen value shares have the upper hand over growth shares. I was wondering if you could give some comments on that trend and name a couple of value stock examples that are held in Alliance Trust.
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Craig Baker: Within our line-up, it was a long period of time where most of the value managers were the ones at the bottom of the list and the growth managers at the top of the list. That all changed during calendar year 2022 - a stark change. Now, we continued to outperform in that period because of the style neutrality of the portfolio and stock selection came through.
But you're right, for a number of the trusts out there that had a very strong value or growth style, that was quite a change for them. In terms of some of the more value-oriented stocks in the portfolio, the most obvious ones would be in the energy sector and those have been ones that helped a lot in calendar year 2022.
GQG in particular rotated their portfolio at the back end of 2021, out of some of the tech names, into a number of energy stocks a little bit earlier [and] that looked as though it was the right decision, but then really came through in spades in 2022 and they did particularly well out of those things like Exxon Mobil Corp (NYSE:XOM), [and] Petrobras (NYSE:PBR) did really well for them in 2022. Interestingly, in the last few months, they've been rotating back the other way, not fully out of energy stocks. They still think they're attractive on a three to five-year time horizon. The particularly interesting thing there is that while they would be considered classic value stocks, and certainly look cheap on traditional metrics, GQG would be considered a more growth-oriented manager. They're called Global Quality Growth - that's the GQG. However, they see it is about the quality of the cash flows and they think the quality of the cash flows are very strong in some of these energy companies and they're at very low prices, and so that's why they found them attractive on the long-term basis, particularly in 2022. But following some of the share price falls, seeing value in some of the more tech-oriented names in the most recent times. But there are other value stocks in the portfolio as well, some of which are starting to come out of the portfolio [of] some of the managers because they've done so well in 2022.
Kyle Caldwell: We're five months into the year. As usual at the start of every year there's lots of predictions, although I didn't see anyone predict that a couple of US banks would fall into difficulty. So, with that caveat in mind, I wanted to ask you what your outlook is for the rest of the year. Are you more bullish or bearish at the moment, and how is that being reflected with the trust's gearing levels?
Craig Baker: So, from a bottom-up perspective, looking at the portfolio, we're very excited about it. We see stocks in there that are producing much better earnings than expectations and haven't necessarily yet had that reflected in share prices. So, we look at it from a bottom-up perspective and think there's quite a lot of latent value in the portfolio. However, we obviously look at it from a top-down perspective and think about what some of the short-term risks to the portfolio are. And there's no doubt that bond markets are effectively saying that there's likely to be a recession, whereas equity markets are essentially saying there probably isn't going to be a recession. And so, we've got some concerns about that dichotomy between the two and hence we are at the lower end of our typical range of gearing at the moment. So, the gross gearing on the portfolio is close to about 7.5%, whereas we might, on average, be around 10% gross gearing. It's fair to say we don't move the gearing levels too much. It tends to be in that 7.5% to 12.5% range most of the time, but we're at the lower end.
Kyle Caldwell: So, does that reflect that you're sort of cautious at the moment, generally?
Craig Baker: Yeah, cautious from a top-down perspective about the market as a whole.
Kyle Caldwell: And finally, a question we ask all fund managers who we interview: do you personally invest in Alliance Trust?
Craig Baker: I do, yeah. So, a lot of my [investments in the equities space] are invested in Alliance Trust.
Kyle Caldwell: Craig, thank you for your time today.
Craig Baker: You're welcome.
Kyle Caldwell: That's it for today. You can check out the rest of our Insider Interviews on our YouTube channel where you can like and subscribe. Hopefully, see you next time.
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