Alliance Trust set to sell investment arm and outsource management

Alliance Trust's board proposes outsourcing management to around eight equity managers who would each create a portfolio of about 20 shares. The managers would be selected by Willis Towers Watson (WTW), a consultancy that creates portfolios for institutions such as pensions.

WTW would pick these managers from about 40 that it rates as "best in class". WTW has about 100 research analysts, 21 of which focus on long-only global equities. Last year WTW launched an institutional multi-manager fund, Global Equity Focus, which outperformed its benchmark by 3.9 per cent between 17 August 2015 and 30 November 2016.

Alliance Trust's board is confident the new approach will improve performance, so proposes doubling the trust's performance target from 1 per cent over MSCI All Country World Index a year to 2 per cent over this, net of costs over rolling three-year periods. It adds that while this portfolio's risk would be similar to the existing portfolio, stock-specific risk would be lower because the trust would have up to 200 holdings compared with around 60 now.

Alliance Trust's board has also maintained its commitment to grow its dividend every year, which it has raised for 49 consecutive years. The trust yields about 1.8 per cent and its dividend for its last financial year was 12.43p.

Alliance Trust's board adds that a manager of managers structure, which is also used by funds such as Witan Investment Trust (WTAN), would mean Alliance Trust could access the world's leading equity managers, many of which UK private investors can't access directly.

The trust's current investment strategy, a focus on global equities with an environmental, social and governance overlay, performed well in 2015. But in the year to date in 2016 it has delivered 18.6 per cent against 26 per cent for MSCI All Country World Index, partly because it is underweight resources stocks, which have recovered strongly, according to broker Numis. It has underperformed MSCI AC World Index over one year, but beats it over three and five.

Under the proposed new structure Alliance Trust would aim for total annual costs below 0.6 per cent. Its current ongoing charge is 0.78 per cent, while Witan has one of 1.08 per cent. Most other global trusts have an ongoing charge over 0.6 per cent.

Alliance Trust would retain a small central team to deal with administration and non-equity investments, which account for around 1 per cent of the portfolio.

Although the changes do not require shareholder approval they will be put to a vote in early 2017, before which Alliance Trust is hosting shareholder forums to give an opportunity to ask questions, details of which will be available at www.alliancetrust.co.uk.

Alliance Trust's largest shareholder, Elliott Advisors, has not said how it will vote because it is waiting to see more details of the proposed changes in a circular due to be published in early January. A source familiar with Elliott says that it views "the externalisation only as an intermediate step in bringing in the discount", adding that the company has held Alliance Trust since 2010 and will continue to be a "patient investor".

The Alliance Trust Shareholder Action Group, which has been critical of the trust's management in the past, says: "The new strategy gives the trust a very cost effective, risk controlled, distinctive identity and will be clearly differentiated from its peers. Provided the performance target is met, there is likely to be a better balance between supply and demand for the trust's shares. This should help to reduce the discount."

In the meantime a share buyback programme has been reinstated, with the aim of reducing the discount to net asset value (NAV). Share buybacks had been suspended since June pending the results of the strategic review. Between the announcement of the proposed changes on 15 December and 20 December, the trust made three buybacks of 8.356m shares worth £51.36m, equivalent to 1.62 per cent of the issued share capital, and has made further purchases since. The trust has the authority to repurchase 75.973m shares.

This has caused the discount to tighten. It was around 8 per cent just before the announcement of the proposed changes on 15 December, but had tightened to 6.5 per cent by 21 December. Its share price increased from about 596p at the time of announcement to 631p by 21 December. Analysts at Winterflood think that a considerable share buyback programme will be required to materially narrow the discount on a sustainable basis.

Alliance Trust Investments, meanwhile, is being sold to Liontrust Asset Management for up to £30m, which represents a premium of at least £5m to book value. This deal is expected to complete in April 2017.

Stay or go?

Analysts at Numis are concerned that a buyer has not been found for Elliott Advisors' stake of 17 per cent, and point out that Elliott could end up owning an even larger percentage of the shares as a result of the buybacks.

"We see little reason to buy the fund until details of the strategy are clearer," adds Numis. "There is already a large, low cost multi-manager investment trust that has a good track record and can be bought on a similar discount, namely Witan."

Ewan Lovett-Turner, director, investment companies research at Numis, also says that following the discount tightening there is an argument for existing investors to take profits, especially as there is no clear outlook on the strategy.

Iain Scouller, managing director of investment funds research at broker Stifel, says: "While Witan adopted a multi-manager strategy over a decade ago, it did take some years for the market to embrace the strategy and for the discount to remain below 10 per cent. We think investors are more familiar with multi-manager strategies these days, but they are likely to want more detail on the potential managers and performance records before deciding to be long-term investors. We suggest that investors who prefer a more traditional single-manager portfolio approach should look to switch as the discount narrows."

Richard Troue, head of investment analysis at Hargreaves Lansdown, says: "Change always brings with it disruption, so investors comfortable with the outcome of the strategic review should be willing to take a long-term view in order to benefit fully from the changes. The trust's future success will hinge not only on the ability of the underlying managers to pick good stocks, but also on the ability of Willis Towers Watson to blend complementary managers into a single portfolio.

"Many of the proposals seem sensible, but there are other global investment trusts with long track records, well established processes, and experienced fund managers at the helm, which are available to UK investors."

But Alan Brierley, director, investment companies team at Canaccord Genuity, says: "The board has seen wholesale change in the past couple of years and we welcome the evolution in the corporate culture. We are encouraged by these changes and Alliance Trust has at long last reached a point where much stronger fundamentals give it solid foundations on which to build."

Jason Hollands, managing director at Tilney Bestinvest, thinks that "time will tell whether this new approach will be successful. Over the years other trusts have moved away from a single-manager model to a partial or wholly manager of manager basis with varying degrees of success, and I think most investors will want to wait and see how this develops",

David Liddell, chief executive of online investment service IpsoFacto Investor, suggests: "You could hedge your bets if you have a sizeable investment in Alliance Trust, and sell down half and see what happens with the other half. This way you would still be taking some advantage of the discount coming in - there should be some aggressive share buybacks - a reason to keep some money in."

But he adds that investors need to consider whether the new policy will provide anything more than Witan, which costs more but "getting the asset allocation right is worth paying up for".