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Pioneering approach leads to profitable changes for Alliance Trust

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Alliance Trust is one of the oldest investment trusts, founded 130 years ago to support pioneer farmers in Oregon and that pioneering spirit continues with its recent changes. It has a market capitalisation of GBP2.6 billion.

Non-executive director Clare Dobie (pictured) says: “What we have done recently is in line with our heritage. We have transformed the trust introducing a new investment approach and we have christened an alliance of best ideas.”

The new format arrived with the appointment of Willis Towers Watson in April 2017, who brought with them their best-in class approach to equity investment, already used by their institutional clients. Willis Towers Watson appoints eight global equity managers who manage their best global ideas in equity portfolios limited to 20 stocks.

Craig Baker, global chief executive officer of Willis Towers Watson and chairman of the committee that runs the portfolio says: “It was the first time this strategy was available to retail investors and we are very pleased to be able to give retail investors access to some of these really special managers around the world who would otherwise be unavailable.”

Investors in Alliance Capital are split evenly between retail and institutional, across pension funds, wealth managers and retail platforms. Mark Atkinson, marketing and communications manager, explains that the Association of Investment Companies has made Alliance Trust one of its dividend heroes for increasing the dividend for 51 years and keeping it part of the mandate going forward.

Recent market volatility has seen the discount approach 7 per cent but Dobie says that it sits in a very stable discount range, with an equilibrium between buyers and sellers. 

The background to the new approach to investing the company’s assets is the best-in-class strategy that Willis Towers Watson has been managing for institutional clients for some 10 years and as a fund for three years.

Baker says: “Every manager is running a truly global portfolio plus there is a specialist emerging markets portfolio.”

The benchmark is the MSCI’s All Country World Index and the target to outperform that by 2 per cent net of fees over rolling three year periods. The first 12 months to end of March 2018 saw the equity portfolio return 5.7 per cent, while the index was at 2.8 per cent.

“It’s different from most multi-manager strategies because we have got managers to run a conviction best-ideas portfolio of up to 20 stocks,” Baker says. “The portfolio principle is backed up by academic work that shows that people running highly concentrated best ideas portfolios perform a lot better.

“What tends to happen is major managers outperform in overweight positions but lose by putting in filler stocks. We don’t want those as we can worry about risk control by how we put the managers together. We say to them ‘just run your best 10-20 stock ideas but don’t worry about the benchmark or peer group risk.”

The managers are all in the institutional fund already. “They know we don’t fire them on the back of short term performance and they know that they are part of an eight manager line up.”

The managers include Bill Kanko from Black Creek Investment Management; Ben Whitmore from Jupiter Asset Management and Andrew Wellington from Lyrical Asset Management. 

To some, investment trusts seem archaic with their company structure and discount but Dobie defends the sector, saying: “Investment trusts provide something that investors find attractive as they get a range of investment strategies, gearing and an independent board to look after shareholders’ interests. Alliance Trust’s shareholders have benefited from the board action of appointing Willis Towers Watson.”

She says that while a performance target of 2 per cent outperformance net of fees might sound modest, it would put Alliance Trust in the top 10 per cent of the sector.

“They have grounds for confidence in this performance target and also are aware that Alliance Trust gives them access to managers that they would not normally be able to access because some are not so well known or are not accessible. Willis Towers Watson has these long standing relationships which make this quite intriguing and it’s all brought together with a 65 basis point target for fees.”

Baker says that, from the investment manager’s perspective, a closed end fund has the big advantage of not constantly having new money coming in and out and having to hold cash balances.

“It’s lower cost as a result,” he says, “because the investment manager is cognisant of how long they in their mandate – we couldn’t do this multi-manager approach anywhere else.”

 

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