After struggling with performance for a number of years, resulting in shareholder pressure (read more on this), in July Alliance Trust announced a new approach to the way it runs its equity portfolio in an effort to deliver consistently strong performance. Spearheading this effort is head of equities Ilario Di Bon, who joined the trust last year from asset manager Fidelity.
A key change will be the structure of the equity portfolio. Alliance Trust used to have four regional equity portfolios, but now it will have one managed by a global equity team. "We look at the world as a whole, finding best ideas on a holistic basis," says Mr Di Bon. "We seek companies that are highly attractive regardless of where they are located and have a more concentrated portfolio, paying attention to long-term fundamentals rather than hugging the benchmark."
Mr Di Bon has assembled a team of global sector specialists with expertise in certain sectors who look for shares across all regions. So if the two best ideas come from the same sector this is not a problem, and conversely it also means there will not be a duplication of ideas from the different regional teams. This has been helpful in the trust's efforts to reduce its holdings from around 200 in January to less than 100 by the end of this year.
The investment team will put together a portfolio of companies they like rather than having set allocations to regions and sectors. However, Mr Di Bon says: "We have to see how a company relates to its sector and region, for example, understand what the problems in the eurozone mean for specific investments and how they represent catalysts and risk factors for the long-term value of the stock."
The investment team will place a strong emphasis on sustainability when seeking shares, for example how a company has advantages in terms of innovation and brand, and how this translates into pricing power. "All this supports us in identifying the long-term intrinsic value of companies so we can then exploit inefficiency in the market," says Mr Di Bon. "Markets are very good at pricing in short-term new flow, creating great opportunities we can take advantage of, if we can step back from the noise and are in a position to assess the long-term fundamentals."
| Ilario di Bon CV |
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Ilario Di Bon joined Alliance Trust in July 2011 as head of global equities, before which he was head of institutional global equities at Fidelity International. This followed eight years at UBS Global Asset Management, latterly as lead portfolio manager, global equities. Before joining UBS in 2000, Mr Di Bon was in industry working in companies such as Tektronix, Electrolux and Benetton. |
For this reason, as well as using in-house expertise, Mr Di Bon also relies on outside relationships - "the less related to the stock market, the better". These include consultants, industry contacts and academics.
"We want to be free thinkers who are not affected by short-term market moves," he says. "When we look at a company we want to examine it in a similar way to someone contemplating buying it for the long term, as in a merger or acquisition, so we try to identify the fair value rather than look at the share price on a Bloomberg screen."
What does he mean by long term? "Long term is different for different sectors," he says. "For example, with Samsung the long-term outlook for smartphones and tablets is two to three years because they have very short product cycles. But with Henkel, a German homecare products company that makes things such as detergent and soap, you can take a much longer view. That said, these are two extreme examples, and typically we look ahead five years."
Alliance Trust may be taking a long-term approach, but it needs to improve performance sooner than five years. "Five years is what we may have to wait for intrinsic value to come through, but the market typically gets to that level sooner," he explains. "The market also tends to discount what happens later on and you get quite erratic situations, whereby the market could get enthusiastic very quickly about a stock, and something you expect to happen in a number of years happens in one. In that situation we typically exit the position."
Absolute improvement
Although the trust is looking to beat the market and its peers, Mr Di Bon says this is "a relative measure of success" and rather wants the best possible result through the cycle (about three years) on an absolute- return basis. "Three years is the time over which I like to be assessed, and over which I assess my team," he adds. "We are looking for consistent value creation rather than a lucky six months here and there."
While Alliance Trust does not have a hedge-fund-style strategy, which completely eliminates downside, the team are looking at ways to limit this. These include a better integration of Alliance Trust's equity and fixed income teams, and a possible rise in the allocation to fixed income, which currently only accounts for around 4 per cent of assets. But Mr Di Bon says it will "not rise dramatically, for example, to around 50 per cent of assets".
Another aspect of the new strategy is a thematic investment approach. Examples the trust is currently focused on include Asian growth, the eurozone crisis, income generation and technological advances. For example, Alliance Trust holds UK-listed Standard Chartered to get exposure to Asian growth, and Clean Harbors to take advantage of technological advances.
"This is to try to understand longer-term dynamics and what value creation is attached to a company," explains Mr Di Bon. "I believe structured themes rather than the fad of the month support a long-term approach."
