Last month Alliance Trust (ATST) announced that its head of equities was stepping down. Ilario di Bon had taken over in July 2012 to oversee a restructure of the trust's equity portfolio, as performance had been poor. With a new investment team under pressure to perform, an activist shareholder building a stake in the trust and a wide discount still on offer, now could be a good time to buy into this global growth investment trust.
- Wide discount to NAV
- New investment team
- Activist shareholder
- Change to investment policy
- Lack of detail
- Discount has been wider
Between July 2012 and late September 2014 the trust's net asset value (NAV) rose 25 per cent, compared with 30 per cent for the FTSE All-Share and 36 per cent for the FTSE World, according to analysts at broker Winterflood.
Alliance Trust has also underperformed the MSCI AC World Index and the FTSE World Index (to which global funds are often compared) over one and three years. It beat the Association of Investment Companies global sector average over these periods, although it trades at a wider discount to NAV than many of its sector peers. The trust currently trades on a discount to NAV of 11.7 per cent, albeit tighter than its 12-month average of 12.6 per cent. The global sector average discount is around 6 per cent.
Peter Michaelis has been appointed head of equities and Simon Clements, who was head of global equities at Aviva Investors, is responsible for Alliance Trust's equity portfolio. They joined Alliance Trust in 2012 as part of a socially responsible investment team of five and brought a number of open-ended funds with them. The two teams that ran the equity portfolio will be merged.
| IC TIP RATING | |
|---|---|
| Tips style: | GROWTH |
| Risk rating: | HIGH |
| Timescale: | LONG TERM |
Alliance Trust chief executive Katherine Garrett-Cox said the changes "will also allow us to promote an integrated and responsible investment strategy which we believe is a necessity, and no longer a choice, in today's world". "Our thematic investment approach remains unchanged and we are committed to delivering capital growth and a consistently rising dividend from our diversified portfolio of global equities and fixed-income investments," she said.
Since February, meanwhile, activist investor Elliott Associates has increased its holding in Alliance Trust to around 12 per cent. The hedge fund has held shares in the trust for a number of years, during which time it backed a proposal to oust the trust's investment team and replace them with outside fund managers, although this was not successful.
Elliott Associates has not taken any action this year, but some analysts think it will use its larger stake to bring about change, especially if the discount remains wide. Hostile corporate actions can tighten a trust's discount to NAV.
"Alliance has struggled to reach escape velocity from an indifferent long-term record and this has impacted its ability to attract new shareholders, and has been a drag on the rating," says Alan Brierley, director of the investment companies team at Canaccord Genuity. "That said, in a sector where it has become increasingly challenging to find value, a discount wider than its peers has attractions. Given the increasing presence of Elliott we do not believe this is sustainable. Alliance Trust has now entered a most critical phase."
He expects the discount to narrow from the current levels and says the trust is "an interesting value situation as the ongoing performance issues can't go on indefinitely".
Risks and uncertainties remain, though. Mr Clements has run open-ended Alliance Trust Sustainable Future Global Growth Fund since 2010, and that fund has underperformed the Investment Management Association Global sector average over one year, placing it in the third quartile - although it beat it over three years, putting it in the second quartile.
Mr Brierley says the inclusion of environmental, social and corporate governance (ESG) factors "is not a panacea for performance issues and details are currently few and far between…this information vacuum needs to be addressed urgently".
Alliance Trust's discount has been wider and, while it started to regularly buy back its shares in 2011, far fewer have been bought back in 2013 and so far in 2014.
Analysts at Winterflood think the trust "will need an improvement in its performance record to attract new buyers and therefore see its discount tighten materially".
So if you have a long time horizon, a high risk appetite and fancy taking a punt on the discount tightening, then Alliance Trust could be an opportunity. Buy.
ALLIANCE TRUST (ATST) | |||
|---|---|---|---|
| PRICE | 440.4p | GEARING | 11% |
| AIC SECTOR | Global | NAV | 510.9p |
| FUND TYPE | Investment trust | PRICE DISCOUNT TO NAV | 11.71% |
| MARKET CAP | £2.46bn | YIELD | 2.21% |
| SET UP DATE | 21 Apr 1888 | MORE DETAILS | www.alliancetrust.co.uk |
| ONGOING CHARGE | 0.77% | ||
Source: Morningstar
| 1-year share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) | |
|---|---|---|---|
| Alliance Trust Ord | 7.66 | 45.92 | 61.04 |
| MSCI ACWI NR GBP | 11.02 | 49.21 | 57.71 |
| FTSE World TR GBP | 11.89 | 53.21 | 63.55 |
| AIC Global sector average | 7.55 | 43.26 | 61.61 |
Source: Morningstar as at 8 October 2014
TOP 10 EQUITY HOLDINGS as at 31 August 2014 (%)
| Visa | 2.9 |
| Walt Disney | 2.8 |
| CVS Caremark | 2.5 |
| Pfizer | 2.4 |
| Accenture | 2.3 |
| Prudential | 2.2 |
| 2.2 | |
| Qualcomm | 2.2 |
| Enterprise Products Partners | 2 |
| Express Scripts | 1.9 |
Geographic allocation (%)
| North America | 48.9 |
| UK | 21.7 |
| Europe | 19.1 |
| Asia & emerging markets | 10.3 |
