Alliance Trust’s (ATST ) multi-manager portfolio is dominated by boutique firms and while the Willis Towers Watson team managing the £3.8bn trust said they do not have a bias towards smaller firms, they tend to find better opportunities there.

At the end of January, Alliance Trust was run by 10 portfolio managers from the following firms: GWG Partners (21%), Veritas Asset Management (15%), SGA (13%), Black Creek (11%), Metropolis Capital (10%), Jupiter (9%), Lyrical (6%), Vulcan Value Partners (6%) Dalton Investments (5%) and Sands Capital (4%).

Most of these are smaller firms and one of the bigger asset managers within the group, Jupiter, may lose its spot following the news that Ben Whitmore is leaving to set up his own boutique firm, Brickwood Asset Management.

WTW’s Stuart Gray said he and fellow managers, Mark Davis and Craig Baker, do not have a ‘bias towards boutique managers’ but ‘tend to find a lot of the characteristics we look for in managers more easily in boutiques.’

Gray noted that at the larger firms there tend to be ‘business distractions’ which can make a fund manager less appealing, while at smaller firms those issues tend not to be present.

For WTW it is critical to understand the ‘whole engine of investing’ within a firm, including key decision makers and researchers that are vital to the process.

Stable organisations and strong investment culture are two other key elements, with the latter easier to find in boutiques that tend to have a simpler structure. However, Gray added that when it comes to dealing with regulatory burdens, access to data, and investment in technology, then larger firms come out on top.

‘It’s quite helpful there are managers in there that you haven’t heard of because it’s demonstrating the fact that we’ve got a global research team whose entire job in life is to go out into the world and find really skilled managers.’

Gray said Whitmore, manager of the Jupiter Global Value Equity and Jupiter Income funds, was an example of an individual they thought was ‘very skilled’ in a big organisation and so the team is currently assessing their options over his portion of the portfolio. WTW is considering keeping the funds with Jupiter, redistributing the money to the other nine managers and also following Whitmore to Brickwood or introduce a new manager.

WTW said Whitmore (pictured below) is currently talking to Jupiter about whether he can take assets he runs to his new firm.

The boutique overweight has helped Alliance, whose share price has delivered 23% over one year, almost double the Association of Investment Companies (AIC) global sector average of 12%.

Longer term, the multi-manager approach appears to be working. According to the company’s fact sheet, since WTW took over in April 2017 the underlying growth in net asset value of 88.5% has beaten the 80.6% total return of the MSCI All Country World index.

According to the latest figures from the AIC, over five years to 26 February Alliance Trust is the second best performer in the 13-strong sector, with a 77.7% shareholder return behind the 80.9% of Brunner (BUT ), a far cry from its former status as an underperformer when ruyn by Alliance Trust Investments.

Betting on Japan

WTW has been running the multi-manager model for Alliance Trust since 2017 and in that time there have been six fund manager changes. Gray said they tend to have a 10-year holding period per manager, which roughly translates to one manager change per year.

Last year saw new entrant Dalton Investments added to the cohort in July. The Japan specialist was ‘more niche’ than the other managers, who tend to have a global unconstrained remit.

‘A lot of global managers tend to have an underweight to Japan, either for cultural reasons, language reasons, or it just does not fit with their investment process,’ he said.

Gray and his team have a strong conviction that Japan is changing and becoming an attractive hunting ground for investors, thanks in part to changes to stock exchange rules and governance standards.

‘We’ve known Dalton for a very long time and saw last year to be the right time to put them in the portfolio,’ he said, but highlighted that while most of the other managers run roughly 10% of the portfolio the Japanese manager has a smaller allocation of 5%.

The bet on Japan has paid off so far. Dalton has done well from its investment in major Japanese banking group, Mitsubishi UFJ, which rose over 11% in January as it looked like monetary policy was normalising.

The rise of AI

Alliance, which is trading on a 5.4% discount to net asset value, has also benefited from its exposure to technology stocks, with several of the magnificent seven in its top-20 holdings. Alphabet is the biggest allocation at 3.9%, followed by Microsoft with 3.8%, Amazon with 3.1% and Nvidia, which has had stellar performance recently, making up 2.5%.

Gray (pictured above) was conscious investor nervousness that the AI tech boom could bust, noting that sentiment was having a strong influence over short-term valuations.

‘The next real phase will be differentiating between the businesses that can actually find a good use for artificial intelligence and really boost their productivity versus those that can’t.’

He said at the moment Nvidia and Amazon were the major ways to play the AI trend, but over time this will broaden out.

Gray added that his team were managing the allocation to these technology stocks from the different managers to ensure they don’t dominate the portfolio.

‘If we see too much risk building up in one particular stock or one particular area, than we can adjust the allocations,’ he said.