Alliance Trust plc (ATST)

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1 1 Alliance Trust plc (ATST) Proposals have been tabled to move Alliance Trust from a directly invested model to a multimanager approach. Eight managers, appointed by Willis Towers Watson (WTW), will each run portfolios of approx. 20 of each manager s best ideas selected across the globe and the board have doubled the performance target to benchmark + 2%. Willis Towers Watson are a major institutional investment consultant globally, with $2.3trn assets under advice and a manager research team of some 115 people. They aim to identify the best managers globally. The board have reiterated their commitment to a progressive dividend, but also demonstrated their determination to tackling the discount materially through buy-backs, having bought back 5% of the company since the announcement. Shareholders will be given the opportunity to vote in support of the proposed changes at a general meeting in February. Summary Alliance Trust is one of the UK s oldest and largest investment trusts. Launched in 1888, the trust has total assets of more than 3.3bn, and has delivered a growing dividend to shareholders every year over the last 49 years. Over the past couple of years, the board of Alliance Trust has been looking at ways to improve the fortunes of the trust, and make it more relevant to investors of today (of all types). Whilst retaining its focus on global equities and aiming to generate returns over the medium to long term, the trust has announced proposals for a material change to the way it will achieve this - moving from a directly invested model to a multi-manager approach. Multimanager funds use a number of portfolio managers among whom responsibility for management of different parts of the trust s assets is divided. Eight equity managers, each specialists in their field, will be selected under global investment management specialist Willis Towers Watson (WTW). Willis Towers Watson s core belief is that active management is the key to long-term returns and that genuinely skilled active managers do exist. The firm places great emphasis on research and due-diligence in order to identify such managers. Typically, WTW favours active managers that run concentrated portfolios and a high active share meaning their portfolios are very different to the index they aim to beat. By sub-dividing a given portfolio between differing active managers, they hope that diversification will lead to smoother, more consistent returns for investors. More importantly, they believe that this will lead to the portfolio achieving the performance target more consistently. Each of the managers chosen by WTW will run a focused global equity sub-portfolio with a high active share. One of the managers will also run a more diversified emerging markets portfolio. With all portfolios combined the trust s overall risk profile is unlikely to change, as each manager is expected to be lowly correlated with the rest. The performance target for the overall equity portfolio to outperform the MSCI

2 2 All Country World Index will be doubled from 1% to 2% net of costs, over rolling three year periods. Currently the trust offers a net dividend yield of 2%, well above the 1.5% weighted average for the AIC Global sector in which it sits. The board has renewed its commitment to a progressive dividend. The board has also restated its commitment to undertake share buybacks in a more proactive manner than in the past, demonstrating its determination by so far buying back more than 5% of the company since the announcement. The latest evolution at Alliance Trust means that it now sits alongside Witan in offering a manager of managers approach in the investment trust universe. Alliance Trust, however, will have a far more focused portfolio with around 200 stocks (as opposed to the 450+ held by Witan) and will be considerably cheaper with an ongoing charge targeted to be 0.6% or less at current scale, compared to Witan s 0.72% (or 0.99% including performance fees). Further, while Witan typically has exposure to the standard portfolios of managers in which it invests Alliance Trust s underlying portfolios will all be segregated accounts specifically managed on the trust s behalf and designed for them as concentrated best ideas portfolios. Witan s fortunes have turned around significantly since they adopted the manager of managers approach, and Alliance Trust s discount narrowed on the announcement of the change in strategy, reflecting the market s positivity on the board s initiative, and is now comparable to Witan (5.5% discount). Shareholders will be given the opportunity to vote in support of the proposed changes at a general meeting in February. Portfolio The proposed changes to the management of the trust will result in a very different portfolio... The proposed changes to the management of the trust will result in a very different equity portfolio. This new portfolio will reflect and comprise the concentrated best ideas picks of a range of eight managers who themselves have been selected by Willis Towers Watson (WTW). The process will be led by an investment committee chaired by Craig Baker, WTW global chief investment officer, and including Stuart Gray, a senior member of the research team, and the two co-portfolio managers, David Shapiro and Mark Davis. The portfolio will have geographic and sector weightings that are similar to those of the MSCI All Country World Index through time, as part of the objective of returns being driven mostly by stock selection decisions rather than macro or industry factors. This notwithstanding, overall regional and sectoral asset allocations will be actively managed by WTW by allocating and reweighting to different sub-portfolio managers. We compared a provisional portfolio projection made by WTW at the end of November 2016 to a factsheet for Alliance Trust published at the same time, and as the tables below show, the new portfolio will look different to the existing Alliance Trust portfolio, particularly in terms of sectoral exposure with a much lower weighting currently projected toward technology and higher weightings projected toward financials and consumer services in particular, the latter being the provisional portfolio s largest overweight. On a geographic basis, there is likely to be less of a change, the main difference being slightly lower exposure to the US and UK. On a stock name basis, the proposed changes will represent a very different portfolio to that currently owned by the trust. Initially a transition manager will

3 3 be appointed to oversee an orderly sale of the existing portfolio, and to make the initial investments required by the contracted managers for each of the sub portfolios. This process is unlikely to take more than a month or two, and will incur an explicit one off cost of around 0.3%, though there may be other inci- Provisional portfolio proposed at end November 2016 Source: Willis Towers Watson, ICB, Factset, Managers Actual portfolio as at end November 2016 Source: Factset/Alliance Trust

4 4 dental costs connected to the change. However, offsetting this, we understand that WTW expect the trading costs of the portfolio in the ensuing months may be lower, reducing the net cost impact of the portfolio change. The portfolio can also be viewed as a portfolio of different funds, and broken down by underlying fund manager and their focus / style of management as any multi-manager portfolio would. As the table below shows, the eight initially selected managers offer a mix of growth, value and quality styles. Each manager will manage the trust s assets via segregated accounts, specifically designed for WTW as concentrated best ideas portfolios. The overall risk profile of the portfolio, which will be monitored by WTW, is expected to remain the same as it is currently but the board anticipates that despite the high conviction approach each manager will adopt stock specific risk will be lower than it is currently given the much higher number of holdings (200, compared with 60 at present). We understand that the correlation of active returns between each manager will be very low and monitored closely as the portfolio matures. Manager breakdown Manager Portfolio focus Holdings Style River & Mercantile Global 20 Value Jupiter Asset Management Global with an income bias 20 Value Lyrical Partners Global with a US bias 20 Value Sustainable Growth Advisers Global 20 Growth CGQ Partners Global + Emerging markets 70 Growth Veritas Global 20 Growth FPA Global 20 Quality Black Creek IM Global 20 Quality Each of the managers will run a single focused global equity portfolio, but there will be different expectations for some of them, tailored to suit the managers characteristics. Jupiter s Ben Whitmore, for example, is a value investor who relies on fundamental analysis to identify companies which are cheap in absolute terms and, because of his natural bias toward income producing stocks, his portfolio is expected to be one of the drivers of the trust s underlying income. The only exceptions to the 20 best ideas on a global basis model will be GQG Partners, a Florida based asset management business led by former Vontobel CIO Rajiv Jain, who will run the Trust s emerging markets exposure via a 70 stock portfolio. Going forward, WTW say the aim is for assets to be split roughly equally between the eight managers, although their differing risk levels and correlations with the other managers will be taken into account to set the exact weighting. Rebalancing will likely only take place should any of the sub portfolios deviate significantly from the WTW target model at any point in time. They expect a turnover of managers in the region of one-in/one-out every twelve to eighteen months. Alliance Trust Savings, the trust s savings platform subsidiary, will remain as an asset on the Trust s books with its own board, as now. The platform, which has 12bn under administration, is now profitable and growth in the number of customers (not in assets - it

5 5 charges a flat fee) will contribute higher revenues, and now profits, which may over the longer term help to bring down the trust s ongoing charge. The platform was valued at 54m (1.6% of NAV) at 31 December 2015 and a new valuation will be published with the next report and accounts in March. A small portion of the portfolio amounting to around 3% of total assets will not be allocated to the submanagers. This consists of a mineral rights holding which will continue to be managed directly by minerals specialist H.P. Drought & Co in San Antonio, and a private equity portfolio which is in wind-down mode, with cash-flows to be managed by WTW. Performance On a NAV basis, Alliance Trust has underperformed its benchmark and the average trust in the AIC Global sector over one, five and ten years. Given the overhaul which is taking place, any reference to past performance is of limited use. Global Equity Focus Fund (GEFF) - which has outperformed its benchmark by 2.7% per annum (3.9% cumulative) from inception on 17 August 2015 to the latest data available 11 January 2017, net of all underlying manager fees and fund expenses. The group also runs an advisory portfolio for a large charitable foundation client, upon which the thinking behind the Global Equity Focus Fund is based which has delivered more than 3% per annum outperformance over benchmark over the last five years to 30 September Each manager will largely ignore the benchmark index and consider risk primarily in absolute terms. However, WTW will also manage risk at the combined level, both in absolute terms and relative to the index, through their choice of managers and the weightings assigned to each. WTW will look to ensure that stock selection is the key driver of returns as that is the real skill-set of each of the managers chosen, and therefore country and industry weightings are unlikely to deviate significantly from the index at most points in time. It should be noted that because of the above, the portfolio will remain close to fully invested most of the time (albeit the managers do have some freedom to hold cash), and therefore limited emphasis will be placed on short-term capital protection during periods when the index is in negative territory. Dividend Source: Morningstar Alliance Trust in its new form will target outperformance of the MSCI All Country World Index of at least 2% per annum over a rolling three-year period from the equity portfolio (previously this was 1% over the same benchmark). WTW runs an institutional fund along similar lines as that proposed which was launched in 2015 the $600m Willis Towers Watson Successive boards have delivered rising dividends (for 49 years now) to shareholders. The more immediate past has seen no change to this pattern, and as the graph below shows, over the past ten years the trust has meaningfully earned more than it has paid out in dividends. This means that the revenue reserve money kept behind which can be used to support the dividend during periods when underlying portfolio income is lean is in a healthy state.

6 6 The board has reaffirmed its ambition to maintain the trust s 49-year record of year-on-year dividend growth. Clearly, over the long run, it will be up to WTW and the underlying managers to deliver the income to support this dividend. However, over the short run we believe that the board will look to do its utmost (using reserves should it need to) to protect the many retail shareholder s income levels by using its bulging revenue reserves. In the past, the trust has never had to use reserves to bolster the dividend. board s macro view. A new feature is the possibility that gearing may be employed directly via allocation of funds to each of the sub portfolios, or used to offset macro risk by investing in ETFs. Derivatives may also come into play as a means to manage risk in the future, but there are no plans for derivatives in the portfolio at this stage. The underlying portfolios will not be allowed to gear up themselves. Management Source: Alliance Trust Gearing Gearing a feature of investment trusts which means borrowing money to invest on behalf of investors, which can accentuate returns as well as losses has been a feature of Alliance Trust for a number of years, and over the past three has rarely dipped below 10% (source: Morningstar). The company has a nominal 100m of 15 year fixed rate borrowings, with the rest a very flexible bank loan. Under the previous setup, gearing was used tactically and tended to increase when the managers saw opportunities on the table, and decrease when they felt more bearish. The facility allows the manager to borrow up to 15% without consulting the board, and a further 15% with the board s permission, but the trust has rarely seen gearing in excess of 18%. This facility remains in place and will continue to be used in accordance with the WTW s core belief is that high conviction active management is the key to long-term returns and that genuinely skilled active managers do exist. Typically, therefore, WTW favours active managers that run concentrated portfolios and have high active share, and by sub-dividing a given portfolio between different active managers with different investment styles, it hopes this in-built diversification will lead to smoother, more consistent returns for investors. The firm places great emphasis on due diligence in order to identify such managers. Craig Baker, the global Chief Investment Officer at WTW will lead the relationship and chair the investment committee that will be responsible for the portfolio. He has 22 years investment experience. Others on the investment committee include David Shapiro who will be lead portfolio manager for Alliance Trust. Senior researcher Stuart Gray and coportfolio manager Mark Davis will also work in the team. David Shapiro has 29 years investment experience. He is a senior portfolio manager and a former head of the global equity research team at WTW. Prior to this he was an equity fund manager for 17 years. Mark has 18 years investment experience and has significant prior research experience in various equity mandates. Stuart Gray has 13 years investment experience. Stuart has been a member of the global

7 7 equity research team for 12 years and has headed the emerging markets research team. All of the individuals on the investment committee for Alliance Trust are also involved on the Investment Committee running the WTW Global Equity Focus Fund. Between them the investment committee have 58 years service under their belts at WTW and we are reassured by their deep roots at the business and experience of working together, which mean an effective portfolio management team for Alliance Trust should be in place from day one. Supporting this committee WTW has a 115-strong research team around the world, including 50 who are focused on equity research and 21 who look at long-only global mandates. Together, they run $87bn for 120 institutional clients with multi-manager structures. The research team undertakes nearly 1,000 meetings with potential fund management partners in the equity space every year and then, having created a shortlist, scores a sub-set of these fund managers on a 1-3 scale, based on numerous meetings with each manager as it approaches a conclusion. WTW will only use those which pass its operational due diligence tests and receive the highest rating 1 of which there are around 40 in the world running global equity mandates at any given time. All of the managers who will run the underlying portfolios for Alliance Trust are in this grouping and WTW has a wait list of 3-4 alternative managers for each slot. WTW have provided a brief run-down of the subportfolio managers, which we reproduce here: BLACK CREEK INVESTMENT MANAGEMENT (BLACK CREEK) Toronto, Canada ( Bill Kanko is founder and president of Black Creek, with 35 years experience in the industry. Prior to founding Black Creek in 2004, Bill was the lead manager for the AIM Trimark Fund and Trimark Select Growth Fund, which had outstanding performance during his leadership from 1999 to Bill is a long-term investor, looking for companies that are growing, are leaders in their markets and gaining market share. These companies tend to benefit from huge barriers to entry and sustainable competitive advantages. In Morningstar s Canadian database, the Black Creek Global Leaders Fund ranks in the top 2% of funds in the global equity category over a five-year period and the top 3% over a ten-year period. FIRST PACIFIC ADVISORS, LLC (FPA) Los Angeles, USA ( Pierre Py and Greg Herr, who have an average 20 years experience in the industry, have worked together at FPA since Pierre, managing director, previously worked at Harris Associates, Salomon Brothers, and Goldman Sachs. Pierre and Greg typically employ a long-term value investment approach, investing in companies that they believe have sustainable business models, exhibit financial strength, are run by operationally strong managers and whose stocks trade at a significant discount to the FPA team's estimate of intrinsic value. For Alliance Trust the team will look to balance this discount with the businesses ability to produce an attractive and sustainable dividend yield. A number of FPA's funds have been recognised for their performance by organisations including Morningstar and Lipper. GQG PARTNERS, LLC (GQG) Fort Lauderdale, USA ( Rajiv Jain is the chairman and chief investment officer of GQG and serves as the sole portfolio manager for each of the firm s strategies. With 20 years of emerging markets experience, Rajiv is among the longest tenured investors in global and emerging markets equities. He launched GQG in June 2016, having previously worked at Vontobel Asset Management for 22

8 8 years; as co-ceo (from July 2014) and chief investment officer and head of equities (from February 2002). He was named Morningstar International Fund Manager of the Year in Rajiv looks for high-quality and sustainable businesses through a fundamental investment process utilising both traditional and non-traditional sources of information. deally, these quality businesses have enduring underlying strengths, which manifest in a variety of economic environments. The result has been portfolios designed to provide capital protection in down markets and attractive returns to long-term investors over a full market cycle. GQG will manage a global portfolio for the Trust with particular focus on emerging market companies. JUPITER ASSET MANAGEMENT LIMITED (JUPITER) London, UK ( Ben Whitmore, who has 20 years experience in asset management, joined Jupiter in 2006 from Schroders. Ben will be supported by Dermot Murphy, who has worked at Jupiter since Ben is well known as a long-standing practitioner of contrarian value investing, investing in companies he considers to be out-of-favour and under-valued. This approach has proved successful with the Jupiter UK Special Situations Fund being top quartile in its sector over 1, 3, 5, and 10 years. LYRICAL ASSET MANAGEMENT(LYRICAL) New York, USA ( Andrew Wellington serves as the firm s chief investment officer and managing partner, and has been involved with active portfolio management for over twenty years, with the last eight at Lyrical. He previously worked at Neuberger Berman where he became the sole portfolio manager for the institutional US mid-cap value product, more than tripling AUM. Andrew will be supported by Caroline Ritter. Value matters most to Lyrical and the team also maintains a strict discipline of investing in quality companies that they believe are relatively easy to analyse. They believe the combination of value, quality, and straightforward business model creates resiliency in the portfolio and the greatest likelihood of long-term absolute performance and outperformance. In April 2015 Lyrical received the Long Biased Equity Fund Long Term Performance award at the annual 2015 Investors Choice Awards. RIVER AND MERCANTILE ASSET MANAGEMENT (RIVER & MERCANTILE) London, UK ( Hugh Sergeant is the chief investment officer of equities at River and Mercantile and was one of the founding partners in He has over 30 years experience and was previously head of UK Equities at Societe Generale Asset Management and prior to that at UBS/Phillips & Drew and Gartmore. The team invest in recovery equities, through an investment philosophy called PVT (Potential, Valuation & Timing) and a process that helps them identify value at different stages of a company s lifecycle and to give signals from a timing perspective as to when that value might be unlocked. Hugh s performance against his peer group has been strong and his UK and World Recovery portfolios are both ranked in the top decile of returns within their IA universe since inception. SUSTAINABLE GROWTH ADVISERS (SGA) Stamford, USA ( George Fraise, Gordon Marchand and Rob Rohn founded SGA in 2003 and average over 30 years investment experience each, having also worked together before SGA. While the team shares a common approach to evaluating businesses and structuring portfolios, the personality attributes of the three portfolio managers are complementary in im-

9 9 portant ways. SGA focuses on building concentrated portfolios of unique, high quality global growth businesses that possess strong pricing power, offer recurring revenue generation and benefit from attractive, long runways of growth. SGA s global growth equity portfolio had achieved a top decile in the Morningstar World Stock Category since inception, while their Global Mutual Fund was featured by Morningstar as one of five Under-the-Radar and Up-and-Coming Funds on 15 November started buying shares in Alliance Trust in 2010, when the discount was at more than 20%, and up until last year the trust stood on a discount as high as 10%. A special deal for Elliot that puts other investors at a disadvantage would be unlikely to receive a warm welcome from other shareholders. It would seem to us that the board anticipate letting Elliot exit bit by bit through the market and buybacks. VERITAS ASSET MANAGEMENT (VERITAS) London, UK ( Andrew Headley has over 20 years investment experience and is supported by co-portfolio manager Charles Richardson. They have worked together for almost 20 years including the last 13 years at Veritas, since founding the business in Veritas focuses on active equity management, utilising its proprietary Real Return approach since inception of the firm. Veritas employs an absolute mind-set when valuing companies and dispenses with any reference to indices when constructing the portfolio. Veritas describe the firm's overall approach as investing in a concentrated portfolio of good quality companies at the right price. The Veritas Global Focus Fund carries a Morningstar five-star gold rating. Discount As the graph shows, for a long time Alliance Trust has traded at a relatively wide discount. However, Alliance Trust s discount narrowed significantly on the announcement of the change in strategy, and is now comparable to Witan (5.5% discount). A number of analysts have questioned the lack of a tender offer which would allow activist investor Elliot (which now owns 19% of the trust) a route out of the trust. Given the trust s current discount (around 5%) one wonders if a tender offer is necessary. Elliot first Source: Morningstar Charges Being amongst the larger savings vehicles for retail investors in the UK, it is fair to expect that Alliance Trust should also be amongst the cheapest. Historically this has been the case, with an OCF ranging between 0.38% and 0.8% over the past ten years. The board have announced that they will be targeting total annual costs of 0.6% going forward at current size, including the cost of executive functions such as company secretarial and investor relations. This compares favourably with Witan which had an OCF (experformance fees) of 0.72% last year (or 0.99% including performance fees). It also compares well with the AIC Global investment trust peer group which has a weighted average OCF of 0.68% (Source: Morningstar). It is perhaps also worth bearing in mind that against the backdrop of a proposed increase in costs the performance target has been doubled.

10 10 Important information Alliance Trust plc is a client of Investment Trust Intelligence. Research produced by Investment Trust Intelligence covering Alliance Trust plc should be considered a marketing communication, and is not independent research. This report has been approved under section 21 of the Financial Services and Markets Act 2000 by Kepler Partners LLP for communication to retail clients and private persons as defined by the Financial Services Authority. This is a marketing document, and should be considered non-independent research as defined in COBS R. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, subject to restrictions imposed by internal rules. This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell. Any prices or quotations contained herein are indicative only. The information in this report is believed to be correct, but its accuracy or completeness cannot be guaranteed. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Please remember that past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. Independent financial advice should be taken before entering into any financial transaction. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority. Click here to read our terms and conditions.