At £3.3bn the investment trust is one of the largest in the IT Global sector but has recently seen a significant reshuffle of its top team, while returns in 2014 could be below the FTSE World index’s for the first calendar year since 2010.In September the trust’s head of equities, Ilario de Bon, left to “pursue other opportunities” and was replaced by Peter Michaelis. Simon Clements took on responsibility for the trust’s equity portfolio, in a streamlining of its investment team.
De Bon had taken over in July 2012 to oversee a restructure of the trust's equity portfolio, as performance had been poor.
Before de Bon’s appointment the investment team was 28 strong but it was then reorganised, with a number of longstanding employees departing.
The most recent reshuffle saw four other analysts leave the trust alongside de Bon’s departure, amounting to £2m in annual cost savings, the company said.
The objective was to create a more focused and efficient investment process in order to maximise risk adjusted returns. The number of holdings was reduced and a higher conviction approach adopted.
But Elliott said: “Despite these changes Alliance Trust’s performance has continued to be dull with its NAV up just 34 per cent since July 2012 compared with 32 per cent for the FTSE All Share and 44 per cent for the FTSE World.”
According to FE Analytics, in 2014 the trust has returned 8.55 per cent compared to an IT Global sector average of 7.63 per cent and a gain in the FTSE All World index of 12.85 per cent.
Performance of trust, sector and index in 2014
Source: FE Analytics
Elliott notes that the reshuffle which saw Michaelis take over from de Bon assured change in the trust’s strategy by making use of the analysis of companies’ environmental, social and governance (ESG) factors.
“The theory is that the higher quality the management team, the better growth prospects for the company,” Elliott said.
Elliott says that despite the Alliance Trust management team making clear that the portfolio was not about to be run on a socially responsible investment (SRI) basis he was expecting more changes to the trust’s equity portfolio.
“The reality is, however, that it has changed relatively little; greater stock conviction has not led to any material changes to country or sector exposures.”
“Its commonality to Alliance Trust Investment’s Sustainable Future funds is relatively low and the management team describe it as a high-quality defensive growth portfolio. Whether the portfolio contains enough potential to generate outperformance remains to be seen.”
Sectorally, exposure has been increased to healthcare, IT and financials, with exposure to consumer staples, energy and consumer discretionary reduced.
Meanwhile there has not been any noteworthy change to the portfolio’s country exposure, Elliott says.
New holdings in the portfolio include CSL, Linear Technology, Roper Industries, NASDAQ, Computershare and Johnson Matthey.
“Our suspicion is that the portfolio has been built on a ‘safety first’ basis with its income requirement necessitating compromises to the SRI team’s natural approach,” Elliott said.
“The SRI element of the investment approach, i.e. the analysis of ESG factors, is a differentiator but it will be interesting to see whether this will have any discernible impact on the portfolio’s performance.”
He adds a lack of material change in the trust’s strategy provides little scope for a tightening of its discount from its current 13 per cent.
Its discount has narrowed over the past five years from 18 per cent but is significantly higher than the average in the sector, which has seen a broader tightening in 2014.
Discount/premium over 5yrs
Source: FE Analytics
Elliott said: “Alliance Trust remains a proposition of future promise despite years of indifferent delivery.”
“Although its [recent] net asset value performance is not disastrous, neither is it good enough to attract new buyers,” he added.
He also says private investors may wish to wait for further clarity following the building up of a significant stake by a single institutional investor.
“With Elliott Associates, a New York based activist hedge fund, now owners of 12 per cent of the fund’s share capital, future corporate activity cannot be ruled out.”
The trust is currently second quartile over one, three and five years but it only beat the index over the longer measure, doing so by 0.53 per cent with approximately the same volatility.
It has an ongoing charges figure of 0.77 per cent and 9 per cent gearing.
