Alliance Trust: the case for stockpicking

Are the bulk of returns driven by asset allocation? This question has dogged many investors over time and multiple studies suggest that this is the case. However, the execution of any asset allocation calls can still make a major difference to overall performance. In the US, the S&P 500 index may have gained 96 per cent over the five years to 23 November in sterling terms, but stockpickers have had massively different fortunes. The best-performing fund in the Investment Association (IA) North America sector over that period was Baillie Gifford American (GB0006061963) with a sterling return of more than 350 per cent. The worst performer delivered less than 40 per cent.

This sheer dispersion may explain why some investors maintain that there is a case for active stockpicking. Craig Baker, global chief investment officer at Willis Towers Watson, the firm that manages Alliance Trust's (ATST) portfolio, is among them.

Like Witan Investment Trust (WTAN), Alliance Trust has a relatively unusual structure that differentiates it from other global equity funds. Rather than simply investing in equities, the Willis Towers Watson team allocates assets to different fund managers such as Jupiter's Ben Whitmore and River and Mercantile's Hugh Sergeant. These managers (see table below) each pick their best 20 ideas, meaning that the portfolio should prosper or fail according to the strength of its stock picks.

“On a sector basis, the portfolio should look quite boring compared with the index, but we want it to look nothing like the index [in terms of] stock selection,” says Mr Baker. “It can outperform quite a lot even though it’s not taking big sector risk. We think you can get lots from stock selection.”

Alliance Trust's stockpickers

Alliance Trust’s largest holdings include names that feature prominently in indices, such as Alphabet (US:GOOGL), Microsoft (US:MSFT), Facebook (US:FB), Amazon.com (US:AMZN) and Alibaba (US:BABA). But other top portfolio holdings such as Salesforce.Com (US:CRM), ConvaTec (CTEC), UnitedHealth (US:UNH), NVIDIA (NVDA) and Charter Communications (US:CHTR) may differentiate it from the competition to a greater extent.

Mr Baker adds that the investment managers within the portfolio “think very differently” – not just to other investors but also to each other. At the end of September just three stocks – Alphabet, Alibaba and Mastercard (US:MA) – were held by more than two of Alliance Trust’s portfolio managers. 

Alliance Trust's focus on best ideas also often means a bias to smaller companies, although Mr Baker insists that the actual stock picks are more important.

“We’re often underweight mega-caps,” he says. “If you have a remit of your best ideas across the world, on average they won’t be overweight the companies that are most covered and largest, and have gone up the most. We’ve had a small underweight to the largest stocks and small underweights to medium stocks.”

This approach has seen Alliance Trust's share price total return race ahead of Witan's over the three years to 23 November. But it lags its benchmark, MSCI All Country World index (ACWI), and the average open and closed-ended global equity funds.

Alliance Trust’s portfolio managers tend to take a long-term approach, typically holding stocks for between two-and-a-half and five years. But – like many stockpickers – they made some changes amid the volatility of February and March. This including divesting of some vulnerable hospitality names such as Airbus (FRA:AIR) and Carnival (CCL), while Booking (US:BKNG) was among the purchases.

Although the 'best ideas' approach means that many holdings fared well at this point, Mr Baker notes that the managers “found high-quality companies they had liked for a while but were [previously] too expensive” suddenly looking cheaper.

Willis Towers Watson has recently made a change to the asset managers that run Alliance Trust's investment portfolio. It has added Dan Lascano of New York firm Lomas Capital Management to replace FPA, after Pierre Py and Greg Herr left this firm. Lomas takes a thematic approach to stock selection, seeking to identify interesting economic and industry trends before choosing companies.

Alliance Trust’s asset allocation may look “boring” compared with MSCI ACWI because the two are relatively similar. Alliance Trust had 56.6 per cent of its assets in North America at the end of October, and this region accounts for 60.8 per cent of this index. The trust and index's second and third-largest allocations were Asia and Europe, respectively.

The trust’s allocation to different managers also varies according to how their investment styles are faring, to keep it style-neutral. For much of this year, allocations to growth-orientated managers GQG Partners, Sustainable Growth Advisers and Veritas Asset Management have been rising to reflect how markets behaved until recently. More recently value allocations have slightly increased.