Alliance Trust’s multi-manager structure means it will never top the performance tables over any short-term period, as this accolade will always go to a single-manager trust whose style is in favour at that point in time.
This is according to Craig Baker, global chief investment officer at the portfolio’s manager Willis Towers Watson.
However, Baker said this structure also means the trust will never fall to the bottom of the performance tables over the short term – adding that over the long term he is confident it will be “one of the best-performing trusts out there”.
Alliance Trust has an unusual set-up for a multi-manager product in that it takes 20 stock-picks from a blend of managers rather than investing directly in their funds.
Aside from helping to keep fees low – the trust’s ongoing charges figure of 0.54 per cent is the seventh cheapest of 21 in the sector – Baker said it is this structure, and specifically the concentrated focus on the managers’ best ideas, that gives him the confidence in the trust’s ability to outperform over the long term.
“The academic evidence is clear that if you randomly throw darts at people that run highly concentrated portfolios, on average you will outperform randomly throwing darts at people that run diversified portfolios,” he explained.
“Now, we are not attempting to randomly throw darts, we think that we can find skilled managers within that set, but by simply fishing in the right pond, you’ve got a better chance of outperformance.”
Baker said the reason for this can be seen in a statistic often cited as a reason to buy an index tracker – by definition, half of active managers will outperform the market and half will underperform in gross terms.
However, while passive proponents point out this means the average active fund will underperform after fees, the chief investment officer said that what is more interesting is that most active managers will outperform in their 10 or 20 largest overweight positions, before destroying value in the rest of the portfolio they hold for risk-control purposes.
“So, what we’ve done is said we are not going to have any stocks in the portfolio for risk-control purposes,” Baker continued.
“We are going to make sure that every single stock in this Alliance Trust portfolio is one of the managers’ very best ideas. And that’s the principle. And that has been very successful for quite some time.”
GQG Partners’ Rajiv Jain, who runs the trust’s global and emerging markets mandate for high-quality sustainable businesses, came to the same conclusion about the benefits of concentration even before joining Alliance Trust.
“I have had an evolution over the years,” he said. “If I was sitting here 25 years ago I would have had 125 names, but I have been gradually reducing that number.
“So, over the last 15-odd years we have been running relatively concentrated portfolios and now over the past four or five years we have been running one portfolio of 20 names.
“And what is interesting is that it actually makes you a little more ruthless in the way you react to data points and cutting back some of the positions and just a bit more precise about what goes in. I think it sharpens your focus a little.”
Sustainable Growth Advisers’ George Fraise, who has a mandate in the trust to seek out global companies that have strong pricing power and recurring revenues, echoed this view.
“Our focused portfolio of less than 20 companies has significantly outperformed our more diversified portfolios of 25 to 35 companies,” he said.
“We also run an ultra-concentrated portfolio of five to 10 companies and I can tell you that has been pretty volatile. But it really is part and parcel of the entire philosophy of Sustainable Growth Advisers: focus on your best ideas, get significant wood behind the arrows, invest with conviction and allow that conviction to thrive.”
While the individual managers on the trust each have a concentrated approach, it is diversified by blending managers with different investment styles. Just one stock is held by three of the eight managers and 11 are held by two.
Alliance Trust has performed broadly in line with its MSCI AC World index benchmark since Willis Towers Watson took over the mandate 18 months ago, but it has significantly underperformed the IT Global average.
Performance of trust vs sector and index under manager tenure
Source: FE Analytics
However, Baker pointed out Willis Towers Watson runs the same strategy for a charitable foundation which has outperformed the MSCI All Country World index by an average of 3.8 percentage points per annum in the five years to the start of 2018.
Alliance Trust is on a discount of 6.85 per cent compared with one- and three-year averages of 5.95 and 7.43 per cent. It is 6 per cent geared and is yielding 1.86 per cent.