Alliance Trust – a fund for all seasons?

Alliance Trust's (ATST) board took something of a left turn at the lights in 2017 when it ditched its in-house management approach and appointed consultant Willis Towers Watson as external investment manager for the trust. Willis Towers Watson had form in managing institutional investment mandates but little experience of investment trusts held by private investors.

The plan was creative but in line with Willis Towers Watson's institutional approach. The company became the overall portfolio manager, tasked with appointing a range of sub-managers to pick Alliance Trust's stock holdings. Each of these runs a concentrated portfolio of their strongest ideas.

Stuart Gray, senior investment consultant at Willis Towers Watson, is one of the managers charged with selecting and monitoring the equity sub managers' performance. "Alliance Trust is about investing for generations, so we're aiming to maximise investors' wealth through compound absolute total returns over the long term," he says.

It's a direct contrast to the 'get rich quick' mentality of many investors nowadays as they try to make big calls on the most lucrative regions or investment styles to hold, for example, the US or China, or value or growth stocks.

"The problem with that approach is that all the evidence indicates it's very difficult to pull off – particularly repeatedly over long periods," continues Gray.

Willis Towers Watson aims to identify and appoint a diverse global range of 'best in class' specialists covering value, growth and quality approaches, and small-, medium- and large-cap stocks, and leaves each to run a 20-stock portfolio in their own way. The company hopes that this approach can play both to its own experience and competitive advantages, and those of the sub-managers.

Importantly, there's no attempt to shift mandates from one sub-manager to another as investment styles or opportunities change with the times. "They just need to be excellent at what they do, analysing companies and picking the right stocks, because we think that will maximise long-term wealth creation," explains Gray.

The key question in a professedly long-term approach is what kind of timeframe manager performance should be judged over.

"I've got about 10 different answers to this, but the simple one is a full business cycle at the minimum," says Gray. "For example, if value and growth each have a relatively strong phase, at the end of a business cycle they should come out about even in terms of returns. The added value above that is down to each individual manager’s skill."

The problem with that answer, as he acknowledges, is that no one really knows how long a business cycle is. Moreover, in recent years central banks have artificially distorted the cycle by manipulating interest rates.

"A business cycle is typically deemed to be about seven years [but] I'd suggest 10 years, ideally, to assess a manager's skill," he explains. "But the reality is that investors' time horizons last more like three to five years at best. That's why we have lots of managers in the trust portfolio. We are trying to maximise returns in the very long term, but there are different ways of doing that."

There's a clear contrast here with the approach taken by, for example, asset managers Baillie Gifford and Lindsell Train, where there is a single clear investment philosophy. This means that during the times when that approach is out of favour the manager has little option other than to try to persuade investors that this is just a temporary setback.

Instead, by diversifying across many different styles through a multi-manager structure, Gray argues, there shouldn't be such long periods of either significant out- or underperformance. "It's a different way of managing investors' short-term behavioural issues to achieve that long-term performance," he adds.

Pushing ahead of peers

Alliance Trust has performed respectably over the year to the end of July with a net asset value (NAV) return of -3 per cent compared with the average return for global investment trusts of -10 per cent, according to Winterflood. Its half-year results for the six months to the end of June likewise show reassuring outperformance amid volatility and the market shift from a growth to value focus. Although Alliance Trust's NAV fell 10.5 per cent in the first six months of 2022 this was ahead of its benchmark, MSCI AC World Index, which was down 11 per cent, and the Global investment trust sector average of -13.5 per cent. The trust's share price declined 11.3 per cent over this period. 

"We've outperformed the peer group quite handsomely in the short term, and I think that tells you quite a lot about the peer group," says Gray. "A lot of people have invested in growth funds and stocks because they’ve been so popular over the past few years. But nothing can go up forever and, during the time they've underperformed, the peer group has really suffered. But it also demonstrates that greater diversity can and does work."

A comment by broker Kepler on Alliance Trust's half-year results acknowledges this point. "The outperformance is in part due to the effective stockpicking of its delegated managers, but also due to the increased pressure mega-cap growth stocks felt during the first half of the year, with Alliance Trust having long held an underweight position to these companies," said Kepler.

Of the sub-managers that have made the biggest impact recently, Gray highlights GQG as a "nimble" manager of quality growth companies. "It used to be heavily invested in US tech companies but started selling out of them about a year ago and buying energy, as well as commodities and healthcare,"  he says. "Most people would say oil companies weren't quality growth businesses, but GQG argued that they were, because managements had taken so much cost out of these businesses that they were very cash-flow positive, even when oil prices were low. And that early rotation of course paid off big-time."

Value expert Ben Whitmore at Jupiter has also had a notably strong run with his UK-biased, classic global value portfolio because value stocks, of which the UK has plenty, have returned to favour.

Gray adds that Willis Towers Watson's diversity strategy has also worked over the long term. Although the consultant has not run Alliance Trust for anything like 10 years, its equivalent institutional strategy over that time has delivered annualised returns of 14.5 per cent, ahead of the benchmark by 2.7 per cent.

The bottom line, he says, is that while the trust will not shoot any lights out over a short period, its deliberately diverse approach and reliance on highly regarded stockpickers means that it can produce strong results over a long timeframe.

Index drivers

However, over interim periods the story is less clearcut. Over one, three and five years to end June, Alliance Trust, in keeping with most of its global peers, failed to beat the global benchmark in terms of either NAV or share price.

"No excuses – Alliance Trust is behind the benchmark, even if it has done reasonably well versus the peer group," says Gray. "As an actively managed portfolio we should be beating the market overall and think we can do that quite handsomely in the long term, but certainly haven't achieved that in the last three to five years."

The fact that the whole Global investment trust sector has struggled to outperform the index is an indicator of the wider headwind facing active managers during this period, argues Gray. The bottom line is that large companies have outperformed since 2018, partly because of the low interest rate and high liquidity environment, and particularly as more money flowed into exchange traded funds (ETFs), further boosting the largest market cap stocks during the pandemic.

"There's been a real tailwind for large-cap stocks which has made the index very hard to beat," explains Gray. "Basically as an active manager you had to be highly concentrated in the biggest stocks if you wanted to beat the benchmark index."

Even now, despite the rotation out of growth, large-cap stocks continue to be preferred to small and mid caps in the current more risk-averse environment, making it difficult for the likes of Alliance Trust to pull well ahead of the index.

But Gray argues that, looking ahead, this is actually good news in many ways. "We think there's still a huge amount of value embedded in the portfolio today and a lot further for it to go in the next few years," he says.

One aspect of that is the established historic long-term outperformance of mid- and especially small-cap stocks over large caps: as and when the former come back into favour with investors, the market cap diversity embraced by Alliance Trust sub-managers such as Jupiter, Lyrical and Black Creek should generate good returns. But in the face of likely further interest rate hikes and potential recession, small caps may be stuck out in the cold for some time yet.

In the meantime, Gray argues that the current macroeconomic and geopolitical worries are providing an interesting environment for Alliance Trust's managers, given their long-term perspective. "The market is moving quite aggressively at the moment, based on short-term macro events, and that volatility is creating lots of opportunities," he says. "We think the long-term values of the businesses our managers own now are really appealing."

Time will tell whether this is the case, but the argument for a having long-term core holding that refrains from pinning all its colours to any one investment style is undoubtedly appealing in the wake of this year's growth rout.

Stuart Gray CV

• 2017 co-portfolio manager of Alliance Trust

• 2003 – joined Willis Towers Watson. Researches long-only and long-short equity managers globally, responsible for portfolio construction and management, co-manager of the Towers Watson Global Equity Focus Funds, senior member of WTW Portfolio Management Group

• 2002 Graduated from The University of Nottingham with degree in Mathematics