Global multi-manager trust cuts exposure to ‘value’ investors but fund manager picker Craig Baker has no intention of abandoning them as he believes their time will come.
Alliance Trust (ATST ) has trimmed exposure to its ‘value’-style fund managers and has no intention of abandoning them as it believes their time will come, but in a classic ‘each-way’ bet remains highly exposed to leading technology growth stocks.
Craig Baker of investment manager-cum-consultant Willis Towers Watson, which marshals the £2.6bn investment trust’s global multi-manager portfolio, said he was ‘very confident’ its current line-up would continue to deliver outperformance.
Speaking to Investment Trust Insider, Baker predicted the current ‘extraordinary’ market conditions would reverse, while also defending big stakes in the FAANG group of tech leaders which could be the chief losers of such a reversal.
‘We certainly haven’t taken out any of our value managers. They’ve obviously had a really tough time,’ said Baker.
‘One of the things we spend a lot of time on are how much of their returns have come from their style rather than picking stocks.’
Alliance has trimmed the portions of the portfolio managed by River and Mercantile, Lyrical and Jupiter. Baker described the first two managers, in particular, as ‘out and out deep value’, while Jupiter’s value-driven Ben Whitmore has also struggled recently.
Alliance does not invest in the funds of its external fund managers but instead asks them to create a bespoke portfolio of their 20 best stock ideas. Unlike rival Witan, Alliance does not publish the performance of the individual managers but as an indication of the pressures value fund managers are under, Whitmore’s £1.7bn Jupiter UK Special Situations fund is in the bottom quartile of its sector over three years and is down 21.4% this year.
The re-jig left US growth managers GQG Partners and Sustainable Growth Advisers in charge of more of the trust at the end of May, accounting for 19% and 14% respectively.
Baker said the shift had been made as ‘the risk in value and small to medium-cap-biased managers has increased’ and, on that basis, was a style-neutral move. Lyrical, in particular, has seen the proportion of the portfolio it heads up cut heavily, by nearly a third from 13% pre-crash in January to 9% at the end of May, according to factsheets.
Year to date, shares in Alliance have fallen 8.5%, beating the 21% slide in Witan, which last month apologised for having gone into the coronavirus crash with an overly optimistic outlook. Over five years, Alliance now leads Witan with a total shareholder return of 74.8% versus 28.7%, although both lag the 111% average of their AIC Global sector, which is led by Scottish Mortgage (SMT ), which has delivered 220%.
‘Double whammy coming through’
Baker was positive about the trust’s performance, given the dominance of US mega-caps in the last few years, which has been exacerbated by the pandemic.
‘It’s been a simply extraordinary event where it’s been a very narrow number of stocks that have done really well and the rest of the market has just done ok. So, if you’ve got that bottom-up 20 stock-type approach, you’ve got that big headwind,’ he said.
‘If you get a reversal of that at some point you’re going to get that double whammy of the stock selection coming through and that bias unwind coming through as well. So, as we sit here today, we’re actually very confident about the performance over the next three years.’
Baker granted it was perfectly possible we could wait a year for any shift which would help their value managers.
Despite the expectation of a pullback, the trust’s top 10 holdings are chock full of tech companies including Alphabet, Microsoft, Amazon, Alibaba and Facebook. Baker defended this positioning – reflective of something like an each-way bet – saying for tech companies, especially, it was easy to see how their dominance could continue. He also pointed out, of these, Google-owner Alphabet, the trust’s top position at 4.7% at the end of May, was the only significant overweight compared to the wider market.
‘This is not a trust that’s sitting here just relying on a value recovery and otherwise it’s going to do badly,’ he said.
‘Depending on where markets go from there you could easily see that some of those technology stocks would continue to do well if markets fall from here, if it’s because of a second wave or whatever it might be.’
About a fifth of the portfolio turned over during the volatile months of March and April. Key trades for the trust included the selling of cruise ship operator Carnival to buy Booking.com. Data provider Nielsen and Bank of America were other sales, with purchases including Dell, Heineken and Valmet, a Finnish industrial conglomerate.
From April 2017, when Willis Towers Watson took over from Alliance’s former in-house fund management team, until the end of May shareholder total returns were 16.6% compared to 22.2% for the MSCI AC World index.