Performance has been one of the key battle grounds between Alliance Trust and activist investor Elliott Advisors.
Alliance Trust has delivered positive returns amid the bull market of recent years while growing its dividend, supporting the trust’s claims it “consistently delivers strong returns”.
Elliott, the activist investor that has nominated three non-executive directors to join the trust’s board, says the trust has “persistently underperformed its sector peers and benchmarks over all relevant return periods”.
Some experts and brokers have also accused Alliance Trust of poor performance in recent years, including last week the trust’s own corporate broker, JPMorgan Cazenove.
The trust’s share price has for many years traded at a discount to the value of its assets. The discount as of last week was around the 13 per cent mark.
Analysis of the net asset value total returns of the trust’s investment portfolio in the five years to April 1 2015 confirms it has lagged behind rival trusts and global equities.
The portfolio gained 51.5 per cent, compared with an average 56.6 per cent gain on the portfolios of funds in the overall Morningstar IT Global Growth peer group.
The FTSE World index used by Morningstar to benchmark the fund gained 62.8 per cent over that five-year period.
Alliance Trust’s share price total return – the actual performance delivered to investors – reached 67.8 per cent in the past five years, matching the peer group average return of 67.8 per cent.
Some of the trust’s performance was thanks to a narrowing of the share price discount from close to 20 per cent back in April 2010.
The trust’s share price performance in the past three years, however, has benefited less from discount reduction, and its 49.1 per cent return over that period compares with a 51.4 per cent return for the peer group.
It might be useful to consider Alliance Trust’s performance in light of the returns of similar super-sized global equity trusts. The £1.5bn Witan Investment Trust, for example, gained 91.3 per cent over five years. The £2.5bn Foreign & Colonial Investment Trust’s return was 72 per cent and the £3.3bn Scottish Mortgage Investment Trust returned 137.2 per cent.
It is this unfavourable comparison of Alliance Trust’s 67.8 per cent five-year gain and the superior returns of many similar large global equity trusts that has attracted attention in recent years.
Read editor John Kenchington’s column on the annual general meeting.
Independent views:
Martin Bamford, chartered financial planner, Informed Choice:
This is a consistently mediocre fund – nothing to write home about from a performance perspective.
Investors need to be prepared to take the very long-term view to be rewarded for their patience. With net assets exceeding £3bn, it has at least been successful in attracting and retaining investor cash.
When considering the performance of an investment trust, it is important to look at the return on net assets as well as what investors actually receive, with gearing and discounting taken into account.
The net asset value total return is unremarkable over one, three and five years, failing to meet the global sector average during those time frames. The total shareholder return looks only marginally better but still lags the benchmark, placing the trust in the second quartile.
This trust has not caught our attention for a couple of reasons. As it is an investment trust in the global sector, investors are delegating control for country allocation to the fund manager. The manager operates without a fixed asset allocation benchmark, which can make it difficult to predict where risk exposure might sit in the future.
Our clients typically prefer controlling their asset allocation, and therefore the risk taken with their money.
The other reason this trust hasn’t appeared on our radar is the closed-ended structure. We are not big fans of investment trusts as the discount/premium pricing and gearing employed by the trust can distort investor returns. They introduce more risks to the fund and it is harder to realise returns when the trust is trading at a discount.
The discount, including income, is currently 13.3 per cent, which makes the trust look good value for new investors, but expensive to leave for existing investors.
With mediocre performance for some time, the discount has averaged around 13 per cent for the past year and there seems to be little prospect of it improving.
Jon Beckett, independent chief investment officer, Gemini Investment Management:
Unpicking the performance of Alliance Trust in itself is not straightforward due to a portfolio mix of direct stocks and internal open-ended funds.
Some of the trust is invested across six Oeics, with a further bit of exposure to private equity, cash and “other” assets. The defensive nature of some of the funds, coupled with non-equity assets, ably explains the trust’s lagging returns to the global index.
The trust is modestly geared, at around 12-14 per cent to net asset value, and this will have only a slight effect on overall performance.
Top holdings include Visa, Walt Disney, CVS Health, Alliance Trust Investments’ Global Thematics fund and its Monthly Income Bond fund.
Where I am left slightly perturbed is where someone is both trust manager and underlying fund manager – for example, in the case of Simon Clements (Global Thematics fund). This gives rise to potential conflicts of interest, not to mention double-charging and bid-offer spreads arising from holding in-house open-ended funds.
In the past year, CVS Health was up around 40 per cent, Walt Disney just under 30 per cent and Visa around 22 per cent. By comparison the Global Thematics fund was up just over 15 per cent and the Monthly Income Bond fund struggled to achieve a positive return at all.
In terms of return of assets, investing in Alliance Trust’s own open-ended funds has created a drag on overall returns or, what we might politely call an “opportunity cost”.
Alliance Trust may rightly defend that such funds help liquidity and diversification. I would expect the use of ‘sustainable’ funds held more justification environmentally than economically right now.
Looking more closely into the £185m Global Thematics fund, it trailed the Global sector through 2012 and 2014. The fund also doubles up in some of the trust’s large positions, such as Visa, Walt Disney, CVC Health and Pfizer, and calls into question the rationale for doing so.
Overall, the performance of the trust has been competent over the past 12 months, with a healthy discount that provides a positive outlook over the medium to long term, markets notwithstanding.
The trust’s large size and use of collectives will drag on overall returns when compared with nimbler, more focused trusts and global index. Trusts should not become funds of funds and internal Alliance Trust positions should be scrutinised.
