DUNDEE-headquartered Alliance Trust underperformed its benchmark in the year to the end of December despite showing improvement in a number of key measures.
The trust, which is in the throes of a process that will see its investment strategy completely overhauled and its assets contract by 20 per cent, made a net asset value total return of 21.5 per cent during the year.
While this was considerably higher than the 5.4 per cent it posted in the previous year, when it outperformed the MSCI AWCI by 1.6 percentage points, it failed to match the 29.4 per cent generated by the index in 2016.
That said, at the end of the period the trust, whose board bought back over 33 million shares during the course of the year, saw its discount narrow from 8.1 per cent to 4.4 per cent year on year while its dividend increased from 11 pence per share to almost 13 pence.
Trust chairman Lord Smith of Kelvin said that underperformance relative to the benchmark was largely a result of stock picking and, to a lesser degree, sector selection.
“In the latter half of the year mid- and small-cap value stocks outperformed the larger, quality growth companies that constitute the trust’s portfolio,” he said.
“Over the year our decisions to increase our weightings in industrials and remain overweight in technology benefited performance. However, our decisions to improve the quality of holdings in financials and energy in 2015 did not continue to provide the uplift in performance achieved that year as lower quality companies rebounded strongly in 2016, outperforming our stock selections.
“The most important sectoral decision we got wrong in 2016 was to remain overweight in healthcare ahead of the US elections, during which investor concerns over the sustainability of drug pricing increased.”
Such positioning will be irrelevant to the performance of the trust in the current year, with its portfolio undergoing a complete overhaul after shareholders backed plans to move to a multi-manager approach earlier this year.
As part of the plan, all the shares owned by activist investor Elliott Capital Advisors, which at one time owned 10 per cent of the trust’s ordinary shares and the rights to a further ten per cent via contracts for difference, have been bought back.
This means the trust is now free to adopt its new approach at the end of April. Under the overall management of Willis Towers Watson, the trust’s assets will be run by managers from London fund houses Jupiter, River and Mercantile and Veritas as well as Black Creek in Toronto, and First Pacific, GQG Partners, Lyrical and Sustainable Growth Advisers in the US.
Aside from Rajiv Jain of emerging markets start-up GQG Partners, who will manage 70 holdings, each will take responsibility for running a portfolio of 20 high-conviction stocks.
Lord Kelvin said the changes should bring about a marked improvement in the trust’s performance.
“The aim of the new approach is to deliver consistently the outperformance target, which has been doubled, maintain our long track record of growing dividends, and maintain the trust’s competitive cost ratio,” he said.
“We are confident that the approach resulting from this review will improve Alliance Trust’s performance on a consistent basis.”
Once the transition to the new managers is complete Alliance Trust Investments, which currently manages the trust and is also owned by it, will be sold to Liontrust Asset Management.
The trust will continue to own its savings platform Alliance Trust Savings, although that business has been separated out into a distinct entity with its own executive function and non-executive board.
The business, which has been bolstered by the 2015 acquisition of stockbroker Stocktrade from Brewin Dolphin, posted a pre-tax profit of £1.2 million. In the previous year Alliance Trust Savings made a loss of £5.2m.
At the end of the year the business, which will transfer to a new platform during 2017, had almost £14 billion of assets under administration.
“The focus of Alliance Trust Savings during the last year has been on the completion of the Stocktrade acquisition and replatforming, both seen as important in growing the profitability of the business,” Lord Smith said.
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