In December the Board of Alliance Trust (LON:ATST) announced plans to change its investment approach by appointing eight specialist equity managers with proven stock-picking skills. The new mandate is designed to improve the performance and is subject to a shareholder vote on 28th February.
If the plans are approved the £3.1bn fund will give investors exposure to the best ideas of a focused and complementary list of global equity managers chosen by the consultants Willis Towers Watson (WTW). The theory is that these top managers will be able to add significant value by investing purely in their highest conviction stocks.
It is thought that on a look through basis the portfolio will comprise between 160 and 200 separate holdings. These will be accessible at a relatively low cost due to the significant bargaining power of WTW that advises on around $2.3 trillion of assets, with the ongoing charges expected to be less than 0.6%.
An ambitious approach
Alliance Trust aims to generate a real return for shareholders over the long-term via a combination of capital growth and a rising dividend. If the new mandate is approved, it will appoint WTW under its CIO, Craig Baker, to run a multi-manager portfolio on its behalf.
This is an area where the firm has built up a successful track record with the key being their exhaustive research. WTW has data on 2,800 different equity managers and 16,500 individual products. They have formally analysed 3,700 of these, out of which only 40 global equity vehicles received their highest rating.
…the £3.1bn fund will give investors exposure to the best ideas of a focused and complementary list of global equity managers…
When selecting fund managers the firm takes into account all the key criteria, including the calibre of the main people that will be involved; the stability of the team; and the depth of fundamental analysis that goes in to the investment decisions. Their aim is to assess the competitive advantage of each manager and whether it is likely to be sustained.
All eight of the managers they have selected received the firm’s highest rating and WTW believes that the combination will result in a compelling portfolio where long-term returns relative to the benchmark will be mainly driven by stock selection rather than macroeconomic factors.
Each of the managers will select around 20 stocks that they consider to be the most likely to deliver positive absolute and relative returns. About half of the portfolio is likely to be invested in the US, with 19% in Continental Europe, 10% in the UK and the rest divided between the other main regions. The process will be monitored by WTW including the income, risk and concentration characteristics.
The Board is extremely confident of this new approach and has increased its target return so that it will now aim to outperform the MSCI All Country World Index by 2% per annum (rather than 1%), net of costs, over rolling three-year periods.
It has also confirmed its commitment to the existing progressive dividend policy that aims to generate a growing revenue stream from the portfolio such that the fund will be able to continue its 49-year track-record of increasing dividends year-on-year. The shares are currently yielding a fairly modest 1.7%.
The new line up
Black Creek Investment Management (Toronto) − Undervalued market leaders
Black Creek uses a long-term fundamental approach with the manager looking to invest in growing businesses that are leaders in their markets and gaining market share. In order to safeguard these positions there should be large barriers to entry, with the companies having significant and sustainable competitive advantages, and competent management that are focused on their shareholders.
First Pacific Advisors (Los Angeles) − Absolute value and quality
First Pacific is a value house that aims to generate superior long-term returns while also concentrating on preserving capital. The manager looks for high quality businesses with strong balance sheets that can survive market dislocations and where the intrinsic value comfortably exceeds the share price.
GQG Partners (Fort Lauderdale) − High quality growth and emerging markets
The firm seeks to buy high quality sustainable businesses at reasonable prices with the main aim being to identify companies that can deliver sustainable earnings growth over the long-term. Particular emphasis is placed on the end consumers of the products and services as they think that this provides a better way to assess the risk.
Jupiter Asset Management (London) − Contrarian
The lead manager, Ben Whitmore, has a contrarian approach and looks for businesses that are out of favour on the premise that any weakness will only be temporary. He thinks that these sorts of lowly valued stocks have an above average chance of outperforming, but will only invest where they have healthy balance sheets and a high return on capital.
Lyrical Asset Management (New York) − US normalised value
Lyrical are value investors that only invest in good quality companies with resilient businesses, reasonable debt levels, good growth prospects, attractive margins and competent management. They tend to avoid deeply cyclical areas such as basic materials and commodities, and will not invest in firms that are too opaque or complex to analyse such as the banks, pharmaceuticals and high tech.
River and Mercantile Asset Management (London) − Recovery stocks
The lead manager, Hugh Sergeant, uses a philosophy called PVT – Potential, Valuation and Timing – that is designed to uncover profitable opportunities. These companies should have the potential to create economic value, be available at an attractive valuation, and provide clear evidence that the re-rating is in progress to help ensure the correct timing of the investment.
Sustainable Growth Advisors (Stamford) − Long-term consistent growth
The firm looks for good quality companies with strong pricing power, which have long-term above market rates of growth and an attractive valuation based on the underlying cash flows. It is a global portfolio that is put together using fundamental analysis with the stocks held for the long-term.
Veritas Asset Management (London) − Quality at attractive valuations
Veritas employs a real return methodology that requires that all potential investments are analysed on an absolute basis. The manager uses a value approach with the aim of generating total real returns with a minimal risk of a permanent loss of capital.
Bright future
The investment trust team at Canaccord Genuity believe that the high conviction approach and genuine active management, when combined with the low cost structure, represents a unique and innovative strategy that should allow the fund to deliver a sustained improvement in performance.
They also think that as markets become less driven by Central Bank policy they will become a more fertile environment for stock pickers who can take advantage of the greater dispersion of returns. This has led them to reinforce their buy recommendation.
Before the announcement of the planned changes, Alliance Trust had been out of favour with investors and had typically traded at a discount to NAV of more than 10%. This has since closed to less than 5%, partly due to the more active use of share buybacks, although if the fund meets its objectives there is every chance that it could tighten even further.