Alliance Trust has protected shareholders from losses in a tough year for investors…
Taking into account all the macroeconomic chaos we’ve seen over the past 12
months, if one were to imagine a trust that invests in global equities and had used
historic levels of gearing to do so, the odds are you’d think it would have taken a
major hit to its net asset value (NAV) and share price in 2022.
Looking at the market as a whole that wouldn’t be a bad call to make. In the 12
months to 22/08/2022, closed-ended funds in the AIC’s ‘Global’ sector averaged
NAV total return declines of close to 18% and share price falls, on a total return
basis, of 22.9%.
Unsurprisingly then, Alliance Trust (ATST) sticks out relative to its peers when
looking at the highly volatile period we’ve gone through and continue to be stuck in.
In the year-long period to 22/08/2022 the trust had delivered a small NAV total return
of 0.6%. Its shares rose, also on a total return basis, by 0.5% over the same period.
True, this may not represent some sort of massive gain for shareholders.
But given how drastically many indices and other active funds have fallen in that time, I’m sure
there are plenty of investors that would’ve been quite happy with those returns.
Moreover, a trust’s performance is arguably best judged relative to its peers. And, in
that sense, ATST has outperformed the average substantially in the last year and is
one of the only global equity trusts to have delivered positive returns for
shareholders in that time.
Those returns were driven by ATST’s unique approach to active management. The
trust uses a multi-manager structure to invest in global equities, with the portfolio
constructed from the highest conviction picks of a group of leading fund managers.
To create that portfolio, global consultancy group Willis Towers Watson (0Y4Q),
which has the mandate for the trust, looks through a group of approximately 200 of
the highest-rated global fund managers. From that group, a top 20 is selected.
That number is further narrowed down to between 8 to 12 managers, who are instructed
to pick their highest conviction stocks, which then make up the ATST portfolio.
The result is a highly diversified closed-ended fund, typically comprised of around
200 stocks. The managers are chosen not just on their stock picking skills, but also
how they complement each other to create that well-diversified portfolio. The stock
selections these managers make are also unique to the trust and investors cannot
access them elsewhere.
Sharp-eyed readers may find one point of contention here, which is that, even with
200 holdings, the trust would still be less diversified than a global equity index.
Superficially that may appear to be the case.
However, the market cap weightings of indices mean that the large size companies
in them can end up dominating and their performance ultimately dictates how an
index performs. So even though you ostensibly have a ‘diversified’ portfolio, there is
actually a level of concentration risk that means investing passively in a global equity
index can result in you being much more exposed to any headwinds the large caps
in that index are susceptible to.
In contrast, ATST may have fewer holdings, but the weightings to those companies
are much more spread out compared to market cap weighted indices. As a result
there is arguably less risk of shareholders in the trust being caught with all ‘their
eggs in one basket’. For example, many global indices were hit hard by the sell-off in
tech we’ve seen during the last 12 months. ATST was not.
What’s arguably more remarkable about this is that the trust managers were actively
using gearing for much of this period. In February, when markets were severely
dented by the start of the war in Ukraine, net gearing stood at 6.5%. At the end of
July the equivalent figure was 4.3%.
You’d expect these sorts of figures to exacerbate losses, given the wider market
conditions. And yet the trust has still managed to deliver relative outperformance.
Again, this would suggest the approach to diversification that the trust takes has paid
off.
But it’s also worth highlighting that the trust is not a one trick pony. Clearly the
managers’ preservation of capital over the last 12 months has been positive but
investors will want the trust to produce returns when the market isn’t experiencing
wild swings as well. In this regard, the trust’s long-term track record still holds water.
Over the decade up until 22/08/2022 ATST delivered annualised returns of just over
12.6%.
There are no guarantees that will continue into the future but it is a positive for
shareholders and prospective investors to take note of. ATST has delivered when
the going was good and protected shareholders when markets performed poorly.
There isn’t much more one can hope for when making an investment.
Disclaimer
This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware thatKepler Partners LLP has a relationship with the company covered in this report and/or a conflict ofinterest which may impair the objectivity of the research.
Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is stronglyrecommended that if you are a private investor independent financial advice should be taken beforemaking any investment or financial decision.
