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Witan axes two managers to increase outperformance potential

Witan has removed two of its underlying managers to further differentiate itself from its benchmark
June 8, 2017

Witan Investment Trust (WTAN) is removing two of the managers that run its underlying portfolio. MFS Investment Management and Tweedy, Browne and Company managed 5 per cent and 3 per cent, respectively, of Witan's assets, but this is being handed over to Lansdowne Partners, Pzena Investment Management and Veritas Asset Management. These had each managed between 10 per cent and 13 per cent of Witan's portfolio, but will now manage about 14.3 per cent each. MFS had run a money for Witan since the trust adopted a multi-manager approach in 2004 via a 'growth at an attractive price' investment style, and Tweedy, Browne and Company had run a portfolio for it since December 2013 via a fundamental value approach.

The decision follows Witan's review of the five managers that ran its global equities allocation and takes down the number of external managers to nine. Witan's in-house investment team decides on an asset allocation and then outsources most of that to external managers to run. Its in-house team runs about 10 per cent of its assets, which are invested in funds focused on specialist areas such as private equity. This is similar to the approach recently adopted by Alliance Trust (ATST).

"The reason for the changes is to increase the performance potential of the overall combined portfolio, says Andrew Bell, chief executive officer of Witan. "Although manager risk diversification is one of the benefits of the multi-manager approach, there is a balance to be struck between the resulting reduction in performance volatility and having a structure with the potential to deliver attractive levels of outperformance, which requires the portfolio to differ significantly from the index.

"One, albeit imperfect, measure of this potential is active share, the degree to which a portfolio differs from its benchmark, with 0 per cent being a replica of the index and 100 per cent having no holdings in common. On this measure, Witan's combined active share is expected to rise from 70 per cent at the end of 2016 to 74 per cent following this portfolio transition. Witan continues to seek to increase the active content within its combined portfolio, to improve the potential to deliver good capital returns and build on our record of 42 consecutive years of dividend growth."

This is despite MFS and Tweedy, Browne and Company having had an active share close to 90 per cent - the same level as the three remaining global equities managers. MFS and Tweedy, Browne and Company had also outperformed the FTSE All World index over the past 18 months.

"One of the unintended side-effects of a multi-manager approach is that even combining good quality managers with competitive performance records you can end up with an overdiversified portfolio due to different managers' choices offsetting each other, which can constrain the scope for outperformance," explains Mr Bell. "Our analysis indicated that we would have a greater potential to outperform with the remaining three global managers than with five."

Dropping these two managers will only initially reduce Witan's ongoing charge by about 0.01-0.02 per cent. Mr Bell says it "is a useful saving, but not the motivation for the change, as we are focused on delivering outperformance after costs, rather than on costs alone. But it will have the effect of reducing the proportion of our assets managed by managers with performance fees from 30 per cent to 25 per cent, which will reduce investment management costs when the portfolio performs strongly."

The managers' performance fees can have a significant effect on Witan's ongoing charge. For example, it was 1.04 per cent in 2015, but fell to 0.65 per cent in 2016 because accruals for performance fee liabilities at the end of 2015 were reduced owing to some external managers' underperformance in 2016.

Analysts at broker Numis say: "Witan provides access to a number of leading managers and has a low ongoing charge given its multi-manager approach. We expect the moves to increase active share to be welcomed by investors. Witan has a good track record, with net asset value (NAV) total returns of 153 per cent, or 13.5 per cent a year, since Andrew Bell took charge in early 2010, ahead of the MSCI AC World index total return in sterling of 142 per cent or 12.8 per cent a year. We regard Witan as an attractive core holding for investors seeking global equity exposure."

Over 2016, Witan's NAV performed in line with its own composite benchmark at the time - 40 per cent FTSE All-Share, with 20 per cent in each of FTSE All-World North America, FTSE All-World Europe (ex UK) and FTSE All-World Asia Pacific.

However, it underperformed the FTSE World index. This was "largely due to the significant UK weighting in our benchmark in a year when the UK significantly underperformed", explains Mr Bell. "Our benchmark's UK weight has since reduced from 40 per cent to 30 per cent, although the review predated the Brexit vote and reflected our belief that there are better opportunities in emerging markets owing to faster growth and maturing governance, and the US because of its enduring leadership in key drivers of growth such as life sciences and information technology."

Earlier this year, Witan added a new manager, GQG Partners, to run emerging market equities after introducing a 5 per cent allocation to this area in its new composite benchmark. This is 30 per cent FTSE All-Share, 25 per cent FTSE All-World North America, 20 per cent FTSE All-World Asia Pacific, 20 per cent FTSE All-World Europe (ex UK) and 5 per cent FTSE All-World Emerging Markets.

 

WITAN INVESTMENT TRUST (WTAN)
PRICE1001pGEARING111%
AIC SECTOR GlobalNAV1045.5p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV4.10%
MARKET CAP£1.8bnYIELD2.00%
SET UP DATE1909*MORE DETAILSwww.witan.com
ONGOING CHARGE0.65%* 

Source: Winterflood as at 7 June 2017, Witan

 

Performance

1-year share price return (%)3-year cumulative share price return (%)5-year cumulative share price return (%)
Witan3548157
FTSE World index3255117
Global trust average3251120

Source: Winterflood as at 7 June 2017

 

TOP TEN HOLDINGS as at 30 April 2017 (%)

Comcast1.8
Princess Private Equity1.8
Apax Global1.5
BlackRock World Mining Trust1.5
London Stock Exchange1.5
JP Morgan1.5
Syncona1.4
Lloyds Banking1.4
Alphabet1.4
Diageo1.3

 

Geographic breakdown (%)

UK*39
North America23
Europe17
Far east13
Japan5
Other3

Source: Witan/BNP Paribas

*Includes funds listed in the UK but invested internationally.