Five-year returns of Alliance Trust (ATST ) have fallen behind its stock market benchmark, raising a question over whether the move in 2017 to a ‘multi-manager’ approach under Willis Towers Watson (WTW) has worked for shareholders in the £2.9bn global investment trust.

Half-year results last week showed the 134-year-old investment company, which sold its fund manager five years ago after losing a two-year battle over poor performance with activist hedge fund Elliott Associates, did relatively well in the difficult six-month period to 30 June. 

Net asset value fell 10.5%, slightly better than the 11% decline in sterling of the MSCI AC World index, although the shares did less well and, even with dividends included, shareholders saw a loss of 11%. Today the shares stand at a 6% discount below their net asset value (NAV). 

However, that still put the Dundee-based ahead closed-end fund ahead of the 13.5% average slide in global equity funds (open and closed-ended) tracked by data analyst Morningstar, as well as the average 18.6% tumble of global investment trusts, its immediate rivals. These include the sector giant Scottish Mortgage (SMT ) whose shares halved in a first half marked by extreme stock market turbulence caused by high inflation, rising interest rates and the selloff in early-stage technology stocks.  

Although primarily a growth, not an income, fund, Alliance delivered good news on dividends too. The first two quarterly payments for this year totalled 12p per share, 62% more than the 7.4p paid a year ago following a reorganisation of the balance sheet that freed up a pile of capital for potential return to shareholders. This puts the Association of Investment Companies’ ‘dividend hero’ on a 2.4% yield and well on track for a 56th consecutive annual increase in its payouts.

Gulf in performance

Nevertheless, there is a growing gap between reality and WTW’s initial pledge, when it took over in April 2017, to beat the MSCI benchmark by a margin of 2% a year by outsourcing the portfolio to 10 external fund managers it had chosen to outperform. 

At interim results a year ago, Alliance reported it had generated an underlying investment return of 58.4%. While this beat the MSCI benchmark’s 57.2% total return, the 1.2% margin was less than the 2% targeted by WTW’s chief investment officer Craig Baker (below). This continued a trend since WTW’s arrival of index-beating but not target-busting returns.

Advance a year and the situation has deteriorated. The trust’s latest fact sheet shows the underlying net asset value including dividends rose 46.4% from April 2017 to 30 June, with shareholders receiving slightly less at 45.7%. By contrast, the MSCI AC World delivered a total return over four percentage points better at 50.6%.

June was admittedly a tough month for markets and investment trusts, and that will have skewed the figures down. Numis Securities’ analyst Gavin Trodd said returns had also initially been weighed down by WTW having to tidy up some of the legacy assets it inherited. 

However, with net asset value returns also underperforming the index over one and three years, that excuse is wearing thin.

‘We believe the concept of investing in the top 20 stock picks from a range of leading managers via a low-cost vehicle is appealing, but the manager is yet to deliver the consistent outperformance that its approach was expected to deliver,’ said Trodd.

Alliance Trust can take some consolation that its performance difficulties are not as bad as multi-manager rival Witan (WTAN ), whose current three-year investment return of 11.8% up to last Friday is well behind the 27% return of the MSCI AC World index.

Small and mid-cap bias

The 194-stock Alliance portfolio last year took 0.6% of shareholders capital in ongoing charges. Like many actively-managed funds it is weighted towards smaller and medium-sized companies, believing they will generate the best returns in time.

Chairman Gregor Stewart said in his results statement that the dominance of giant ‘mega cap’ stocks had waned this year and ‘was not as strong a headwind, although it has not yet turned into a tailwind either.’

Noting that the MSCI’s global larger company index had outperformed its global smaller and ‘mid-cap’ index in the first half, he added: ‘If mid- and smaller-cap companies start to edge ahead and fundamentals come back into focus, we believe the portfolio will do even better.’

Alliance Trust currently has nine external fund managers after WTW terminated River and Mercantile’s mandate in March fearing its staff would be distracted by the reorganisation of the company, which had sold its investment solutions business to Schroders (SDR ) and was shortly afterwards taken over by Martin Gilbert’s AssetCo (ASTO).

More than half of Alliance’s assets are invested in North America, with Asia and emerging markets and Europe a combined 29.6%.

Technology is currently the largest sector at 23.4%, followed by 13.2% in industrials and 12.1% in communication services. The largest position at 3.8% of total assets, Alphabet, recorded a share price fall of 25% over the six-month period. 

Second largest positions, Visa and Microsoft fell 10% and 22.5%, bearing the brunt of the market rotation to value from growth.  

Board has conviction

Alliance Trust did not disclose the performance of its fund managers, but US-based Citywire A-rated GQG Partners’ emerging markets star Rajiv Jain runs the biggest slice of the portfolio at 21%. Veritas, Black Creek, Jupiter, Sustainable Growth Advisers, Metropolis Capital, Vulcan Value, Lyrical and Sands Capital Management look after the rest with a mix of global investment styles.

Stewart believed WTW’s approach would come good in time. ‘Our portfolio is characterised by companies that are fundamentally sound with attractive valuations and stronger and more stable prospects of growth than the index. 

‘We, and WTW, believe that our diversified, high-conviction approach will deliver steady returns over the longer term with less volatility than many single manager strategies,’ he said.

The question is whether that is enough to convince Alliance shareholders. While performance has not been disastrous, it has so far not lived up to expectations.