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A clean approach for Alliance Trust

New manager Peter Michaelis tells Leonora Walters how he plans to integrate environmental factors and maintain a rising dividend
February 11, 2015

The 126-year-old Alliance Trust (ATST) has struggled to reinvigorate performance in recent years, with analysts at Winterflood Securities recently calling it a "jam tomorrow story" of undelivered promises.

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The £2.7bn giant of the investment trust industry has undergone a number of management changes over the past few years in an attempt to improve performance and tighten the discount to net asset value (NAV). Last September, after just over two years in post, head of equities Ilario di Bon was replaced by Peter Michaelis.

Read our interview with Mr di Bon

Dr Michaelis joined Alliance Trust in 2012 when it bought Aviva's socially responsible investment team and Sustainable Future open-ended funds. Under his management, Alliance Trust says it "will continue to be an unconstrained global trust and the thematic investment approach remains unchanged," but with "environmental, social and governance factors forming an integral part of the investment process".

"The Sustainable funds are very growth focused but Alliance Trust has a balance between growth and income," says Dr Michaelis. "The Sustainable funds also have a very pre-defined list of sectors they cannot invest in, but this will not apply to the trust. We will continue Alliance Trust's progressive dividend policy."

He likes companies with the ability to pay and maintain a dividend, though this is not associated with companies that meet environmental, social and governance criteria. "In the UK the big areas you associate with high dividends include tobacco and oil," he says, "but globally dividend payers are much more diversified so finding investments that fit with environmental, social and governance criteria and pay dividends is not a challenge. We also spread the reliance for dividends across the portfolio so are not concentrated on a few heavy payers. We have more stocks like Prudential (PRU) which offers a yield of just over 2 per cent. Prudential has a very strong long-term growth story due to its penetration into Asian insurance markets."

When choosing shares he looks at business fundamentals, and targets companies which can sustain high returns on equity, have structural advantages and a competitive edge. Recent portfolio addition biotech company CSL (Aus: CSL), which specialises in blood fractionation "sits within a nice industry structure where there are only three major companies that do this and consistently grow with a strong margin".

He also tries to identify companies undervalued by the market. "We can take a longer view than most on this," he says. "We are interested in what a company can generate in three years."

To these considerations Dr Michaelis and his team add an assessment of a company's corporate governance, sustainability and how it operates. "For every company we invest in, we consider if over the longer-term a product or service is likely to deliver to society, and whether there will be more or less demand for it in 10 years' time," he says. "If there are long-term drivers of demand for products, a company in those areas will probably find it easier to grow."

He also worries about major losses of investor value from non financial factors. "It is sensible to assess companies for risk as well as opportunities," he says. "With resources companies we assess health and safety, political risk, and environmental record." The latter became a problem for BP (BP.) following its oil well spill in the Gulf of Mexico in 2010.

He is very selective when investing in financials. "We look at the product they sell and whether it is beneficial to the users or being mis-sold, and the company's record on fines and financial incentives. "We have no investment banks as they are very hard to predict, and few conventional banks because we are in a low return world."

However. Alliance Trust has quite a lot of exposure to life assurers, and holds companies such as stock exchange Nasdaq (US: NDAQ), and Computershare (ASX: CPU) which specialises in share administration. "These benefit from increasing regulation as there is more focus on accountability of trading and knowing where shares are held," he says.

 

Peter Michaelis CV

Peter Michaelis is head of equities at Alliance Trust and lead manager on some of its sustainable investment funds. Before this he spent 11 years at Aviva Investors, most recently as head of sustainable and responsible investment. Prior to this he was a socially responsible analyst and assistant fund manager at Henderson Global Investors.

Dr Michaelis has an MA in Physics from Oxford University, an MSc in Energy & Environmental Engineering and a PhD in Environmental Economics. He also holds the Investment Management Certificate.

Since taking over Dr Michaelis has reduced the number of stocks in Alliance Trust's portfolio from 84 to 75. "We like to have more conviction in each position," he says. "We have slightly increased the growth portfolio, and have more healthcare, technology and financials."

He has sold commodity marketer and producer Glencore (GLEN) due to corporate governance as well as commodity price concerns. Oil services companies Oceaneering International (US: OII) and Seadrill (Nor: SDRL) were also dropped from the portfolio. "The predictability of commodities is very uncertain," he says. "Oil and gas services were reduced at the end of October, partly because of environmental, social and governance considerations, but primarily due to business fundamentals as returns are increasingly uncertain."

He sold holdings in Toyota Motor Corporation (Jap: 7203) and Volkswagen (Ger: VOW3) because he thinks automotives are a very cyclical sector with thin margins. "There is over capacity in their market and the products are not distinguishable," he says. "It is hard to tell who will grow their market share. We prefer the companies supplying them with components such as Johnson Matthey (JMAT) which makes catalytic converters). We can see growth coming through in these from pollution regulations."

To play this theme he also added semiconductor device maker Linear Technology (US: LLTC) and Roper Industries (US: ROP) which offers exposure to the increasing automation of cars.

Some analysts believe Alliance Trust's large size mean its performance cannot improve because it is restricted to investing in larger companies. Large funds can struggle to take meaningful stakes in smaller companies.

But Dr Michaelis argues. "In our global funds we have always invested in companies £1bn plus in size: we consider liquidity a risk so not being able to invest in smaller companies is not a hindrance. We are also not trying to trade the portfolio every month as we take a long-term approach, so although the trust is bigger than the funds we run it is not a challenge. It is early days but we anticipate strong investment returns."