Is Alliance Trust too reliant on the Magnificent Seven?

Global investment trust giant Alliance Trust (ATST) could face headwinds if the market’s enthusiasm for the so-called Magnificent Seven stocks were to cool down, analysts have warned. But the trust’s recent outperformance was also propelled by strong stockpicking in other areas of the market.  

Alliance’s shares returned 21.2 per cent in the year to 8 March, well ahead of the 14.1 per cent delivered by its benchmark, the MSCI All Country World Index. As of 31 January 2024, the trust had 14.6 per cent of its portfolio in five of the Magnificent Seven stocks, excluding Tesla (US:TSLA) and Apple (US:AAPL), against a roughly 17 per cent exposure for the All Country World index.  

“We are always wary of 'bubbles' and assume at some point the market will dramatically shift away from the Magnificent Seven and similar companies, with this likely to have a negative impact on Alliance's performance,” said analysts at Stifel. 

But Mick Gilligan, head of managed portfolio services at Killik & Co, said the trust’s Magnificent Seven exposure had come naturally, as a result of a multi-manager strategy in which 10 stockpickers with different styles run concentrated strategies of 10 to 20 stocks. The trust seeks to outperform the index through stockpicking only, and is by design neutral in style, country and sector. 

“I have always thought that when two or more managers with different styles and approaches alight on the same stock, there is probably a case for having more money in that stock,” Gilligan said. The concentration “should also mean greater scrutiny and a willingness to sell or reduce a position if conviction reduces”, he added.

In its 2023 results, the trust said the exposure to the Magnificent Seven accounted for 34 per cent of the total portfolio return, significant but below the 53 per cent of the comparative index. Of the Magnificent Seven stocks, only Alphabet (US:GOOGL) and Amazon (US:AMZN) were among the top five contributors to the trust’s performance for the year, with the others being Brazilian energy company Petrobras (US:PBR), Uruguayan e-commerce company MercadoLibre (US:MELI) and US IT company Kyndryl (US:KD). Meanwhile, underexposure to Nvidia (US:NVDA), Apple (US: AAPL) and Tesla (US:TSLA) were among the biggest performance detractors. Alphabet, Microsoft, Amazon and Nvidia are four of the five top holdings, however. 

“We had no exposure to Tesla, had a relatively low weight in Apple and a below benchmark weight in Nvidia early in the year when the stock soared, which detracted from relative performance. This demonstrates a selective approach to the Magnificent Seven by our stockpickers based on their assessment of business fundamentals, as opposed to treating them as a homogenous entity,” Alliance’s managers said. As of 31 January, Apple was no longer in the trust’s portfolio. 

James Carthew, head of investment companies at QuotedData, said that “it cannot be stressed enough how difficult it was for an actively managed portfolio to outperform the global equity index last year” without full exposure to the Magnificent Seven.

Jupiter ‘under review’

Alliance uses 10 stockpickers, one of whom is Jupiter’s Ben Whitmore, who is leaving the asset manager to set up his own boutique firm. Alliance has put the manager “under review” and it is still considering options, but Jupiter may lose its spot in the roster. The trust also added a new manager in 2023, Dalton Investments, which specialises in Japan small-cap value equities. The multi-manager strategy was introduced in 2017 but has already made up for the trust’s underperformance earlier in the decade, Carthew noted.

As the chart below shows, Alliance has the lowest discount to net asset value (NAV) among the big trusts in the Association of Investment Companies (AIC) global category. The trust has a track record of extensive buybacks but has been able to reduce them significantly recently. Investec analysts Alan Brierley and Ben Newell attributed this to investor “confidence that the board will continue to maintain a stable discount, and growing recognition of the performance record”. “While discount management across the industry has left room for improvement in too many cases, Alliance has delivered on its strategic objective to maintain a stable discount,” they said. 

With 57 years of consecutive dividend increases, the trust is one of the top AIC ‘dividend heroes’. The dividend increased by 5 per cent year on year in 2023 and the dividend yield stood at 2.1 per cent as of 8 March. 

The trust’s gearing is relatively low at 4 per cent. The managers said that, with the outlook for equities remaining uncertain, they intend to maintain a cautious approach. “Macroeconomic and market volatility typically leads to higher differentiation of valuations between stocks, which skilled stockpickers can exploit for long-term advantage,” they added.