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Alliance Trust

27 June 2018

Craig Baker explains his role as team manager choosing eight world-class stock pickers.

Let’s play fantasy fund manager. If you were asked to pick a World Cup winning global equity team, who would you select? You know you can’t rely on a single star player to win the game; you need experts in all key positions who play together as a cohesive unit. The manager’s role is key in achieving this.

The Alliance Trust multi-manager portfolio consists of eight world class stock pickers, each chosen by Willis Tower Watson (WTW) using a combination of quantitative and qualitative research. Some are familiar domestic signings, such as Ben Whitmore at Jupiter, while others are overseas talent. Indeed, managers such as Bill Kanko of Black Creek Investment Management in Canada focus on institutional clients and are only accessible to retail customers in the UK through the investment company.

Drawn from a pool of 40 global top performers judged by WTW to be top rated for the asset class, they each have different but complementary styles. Once picked, the instructions from us are simple: build bespoke portfolios of your best 10-20 ideas globally, leaving out the fillers or benchmark huggers that might be included in more diversified portfolios. We don’t want the stock pickers’ best ideas portfolios to carry any passengers that might dilute returns.

Our role as team manager of the stock pickers is then to keep a watchful eye out from the touchline to ensure they play well together and don’t have too many overlapping positions, though in practice this rarely occurs because each manager tends to stick to their particular style discipline. Quality growth managers, such as George Fraise, Gordon Marchand and Rob Rohn, of Sustainable Growth Advisers in Stamford, USA, and deep value managers, such as Hugh Sergeant at River and Mercantile, rarely invest in the same stocks.

When the stock pickers’ selections are blended together, they look similar to the benchmark in terms of country and sector allocations. Thus, the portfolio offers broad exposure to the shape of the global economy. But with an active share of 80%, at the stock level the portfolio is nothing like the index.  We call it a diversified, high conviction portfolio. This sounds like a contradiction in terms but is, in our view, the optimal multi-manager structure.

One highly skilled stock picker can produce impressive bursts of performance but they’re sometimes followed by a slump. If active managers stick to their convictions, performance more often than not improves again and, over time, the end result can be meaningful outperformance versus the benchmark. But the ups and downs along the way can be somewhat nerve wracking. We believe the design of the Alliance Trust best ideas portfolio can deliver both higher alpha than a traditional multi-manager offering, comprising a series of diversified off the peg portfolios, and lower volatility than one high conviction stock picker playing on their own.

Of course, confident investors can always pick their own managers, but they won’t necessarily have the same access or rigorous selection process that we do and they will also probably pay a much higher price to assemble the team. The breadth and depth of our relationships with a wide range of managers globally gives us significant buying power that has enabled us to negotiate a very attractive deal for retail investors used to being charged much more than 0.65% for a high quality multi manager portfolio. It also means that we have a deep bench of substitutes to slot into the team if one of the stock pickers gets injured or loses form.

The portfolio has only been in play for just over a year so it’s still early days, but performance so far has been encouraging, beating the MSCI All Country World Index by more than the target of 2% after costs in the first 12 months. Nine years into the second longest bull market in history and with global equity valuations looking stretched, we expect returns to moderate from here and volatility to increase as the ultra loose monetary policy adopted in the wake of the financial crisis is unwound. But even if opportunities are limited at the aggregate level, there are still many attractive stock specific situations for skilled bottom up stock pickers to exploit. Indeed, stock pickers such as Andy Headley at Veritas and Bill Kanko at Black Creek have been taking advantage of recent dips in valuations to increase exposure to high quality companies like Safran, the aircraft engine manufacturer, and Hain Celestial, an American-based, leading organic and natural food, beverage and personal care products company.

The portfolio contains many such opportunities for investors seeking consistent capital growth. As one of only four investment companies that have increased their dividend every year for 50 years or more, Alliance Trust also provides investors with a reliable source of income. Net net, we think that’s a compelling result and should keep our all-star team challenging for the title season after season.

Craig Baker is Global Chief Investment Officer of Willis Towers Watson, the managers of Alliance Trust.

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