Alliance Trust failed to beat the MSCI ACWI benchmark for the second year running, ending 2021 around 3.1 percentage points behind the index, according to the firm’s annual report.
It had a small lead on the benchmark for most of the year but valuations dipped in the fourth quarter as holdings in China, a focus on small caps and a lack of US tech dragged performance.
Returns were still positive for the fund of funds, up 16.5% in 2021, but only three of the ten global managers that it allocates capital to successfully beat the benchmark.
Total return of trust in 2021
Source: FE Analytics
The £2.8bn portfolio is a popular choice among investors, delivering total returns of 49.7% over the past five years but it has trailed 8 percentage points behind the benchmark in the same period.
Here, Trustnet looks at the key issues with the portfolio that led to its decline in performance to the close of last year.
China
China was not the most lucrative market to be invested in last year as government clampdowns on Chinese businesses damaged inflows and led to a mass sell-out of the region.
The MSCI China index is down 35.4% over the past year as investors fled the volatile sector, with lockdowns in the country adding more pressure to an already struggling supply chain.
Several of the Alliance trust’s fund managers had large holdings in the sector such as Sustainable Growth Advisers (SGA), which suffered losses when the share price of Chinese tutoring business, New Oriental Education sunk 91.9%.
Share value of company over past year
Source: Google Finance
Likewise, the trust took a hit when two of its funds, River and Mercantile Asset Management and Black Creek Investment Management, held shares in China’s internet search engine Baidu, which dropped 48.6% in price over the past year.
Despite these drawdowns, Baidu will remain in the portfolio as search engines have gained strong support by the Chinese Communist party, which could place it in a favourable position moving forward.
The investment managers of the trust – Willis Towers Watson – said it will “view the loss as short-term volatility within the context of their long-term investment horizon.”
US tech
While many US tech stocks have struggled over the past couple of months as investor sentiment turned away from growth assets, the steady performance of some companies in the difficult period kept many portfolios in the sector afloat.
Alliance Trust, however, did not have large allocations in these shares and returns suffered as a result. Unlike the rest of the index, the trust had no holdings in Apple and Tesla, which were each up 34.5% and 17.4% in share price over the past year respectively.
Share price of companies over past year
Source: Google Finance
The trust’s investment managers estimated that overall performance was detracted by 0.7% due to the fact it held neither of these companies.
Some tech stocks that it does hold, such as Fleetcor technologies (down 16.8% over the past year) and Charter Communications (down 2.5%) lagged the market.
It has a large allocation to information technology and communication assets, which together make up 40% of total holdings, but the stock picks in this area were not best placed.
Outlook
Moving into 2022, the trust’s investment managers said that inflation will bite into returns and slow the high growth rate of corporate profit witnessed last year.
Despite the performance lag created by assets in China, they want to maintain its 13% allocation to the region. With the threat of Covid receding, it suggested that the worst of China’s economic problems have passed.
Share price of companies over past month
Source: Google Finance
The Alliance trust investment managers said: “Overall, whilst uncertainty does cloud the region, we continue to believe the long-term case for Chinese equities remains and the region provides selective investment opportunities, potentially broadening sources of diversity available to investors.
“As current global constraints start to ease, and concerns over the Omicron variant continue to dissipate, we believe we will see a continuation of market recovery.”
As for the trust’s technology stocks, some of its worst hit assets have made a slight recovery in the past month, with the share price of Visa up 8.7% over the past month.