Don’t worry if you missed our virtual event with Alliance Trust (ATST ) this week. You can watch the whole thing here!

During the programme, Craig Baker of Willis Towers Watson explains how he picks and oversees the nine fund managers in charge of the global equity investment trust’s assets and answers questions from viewers and Citywire’s Gavin Lumsden.

Topics covered include:

• balancing investment conviction with diversification;
• blending value and growth approaches;
• tobacco companies and ESG;
• why Google-owner Alphabet is Alliance’s top stock;
• and prospects for global markets. 

Can’t watch now? Read the transcript

Gavin Lumsden:

Hello and welcome to ‘An Equity Fund for all Seasons’, a one-hour programme brought to you by Citywire and Alliance Trust. My name is Gavin Lumsden, I’m from Citywire and with me in the studio is Craig Baker, global chief investment officer at Willis Towers Watson, who oversees Alliance Trust’s £3.3 billion investment portfolio. Craig, very good to see you.

Craig Baker:

And you.

One-stop shop

Gavin Lumsden:

As Craig will explain, Alliance Trust uses a multimanager structure, which means it can act as a one-stop-shop for investors wanting quick access to a range of global fund managers, rather than having to pick the managers themselves. It’s an approach that some investors may find attractive after the poor performance of growth funds in the past 18 months. After my introduction, Craig will give a presentation. After which, I will ask him a few questions and then, it’s over to you for Q&A in the last section of the show. If you have a question for Craig about the trust or investing, you can submit it at any time via the Q&A box in Zoom. I will monitor your questions and put them to Craig. That’s enough from me, Craig are you ready?

Craig Baker:

I am, yes.

Gavin Lumsden:

In your own time then.

Focused multi-manager approach

Craig Baker:

Terrific. Well, thanks very much for the opportunity to chat to you today. As Gavin said, the idea of the whole setup on Alliance Trust was to offer a one-stop-shop for the retail investor. Really take the difficult decisions out of the retail investor’s hands and be a core holding in anyone’s equity portfolio. Willis Towers Watson started running it under this approach on 1st April, 2017. So just over six years ago. I chair the investment committee at WTW that runs the portfolio and I have two co-portfolio managers on that investment committee with me. Stewart Grey and Mark Davis. All three of us have been involved since that period in 2017, when we took over the trust.

So, let’s dive into what the objective of the trust is and how we go about achieving that, before we dive into the detail of what the portfolio looks like and what the performance has been and so on and so forth. So, we’ve got that up here. Ultimately, the job we’re trying to achieve is to produce long-term returns and achieve that through a combination of good capital returns in excess of inflation and a rising dividend. So that’s the key objective for the trust.

It’s our view that over the long-term, if we achieve these objectives set out here, we will also significantly outperform the MSCI All-Country World index but will also significantly outperform the investment trust peer group and the wider peer group at large. We’ll talk about how we’ve managed to do that over various periods, until the most recent date.

So as said, it’s a multimanager approach, but it’s a multimanager approach with a bit of a difference. We’re very much what we call a focused multimanager approach. So, we’re asking the managers to construct highly concentrated best ideas portfolios and I’ll touch on that in a bit more detail. It’s done in a multimanager environment, which we think brings genuine diversification to the portfolio. So, this is a portfolio that should do well in all kinds of market environment. It hasn’t got a strong bias through style. You’re not reliant on one individual stock picker, one individual organisation even. So that’s the big advantage there in diversification. Now the problem with most multimanager approaches, is twofold. Firstly, there’s a danger that they become overly diversified.

So, the likelihood of being able to beat the benchmark goes down quite considerably because you’re over-diversified and secondly, that it becomes quite costly because there’s a double layer of fees. We try and address both of those issues with the way we’ve constructed all of this. So firstly, this high conviction approach means that you can still significantly outperform. Secondly, with WTW’s brand and size of assets under advice. We advise on $5tn of assets globally, in the institutional space and we manage close to $200bn along similar lines to Alliance Trust in terms of a multimanager approach. That means we’re able to get the underlying stock pickers to do this at a much more attractive fee than you could get, if you tried to do that yourself.

Best stock ideas

Again, this advantage of bringing something different that the individual retail investor couldn’t get, trying to do it themselves. We can then also get exclusive access to managers that aren’t typically found in the retail space. So, some of the managers will go through. You can’t access in UK retail space, other than Alliance Trust, but importantly, none of them you can access their 20 stock best ideas portfolio, other than through Alliance Trust. The next piece is that we do that with sustainability in mind. So, we have EOS at Federated Hermes, one of the largest engagement overlay specialists in the world, engaging with the companies that are in the portfolio on our behalf and we also have a net zero pledge for the portfolio as well and we could perhaps touch on that in the Q&A later if it’s of interest to people. Finally, we do all of that, going back to that objective I talked about before, ensuring that there’s a rising dividend every year and it’s been well over 50 years that we’ve been able to do that. As I said, we’re a ‘Dividend Hero’ under the AIC definition there.

So why do we follow this highly concentrated 20 stock approach? Apart from the simple idea that we don’t want to be over diversified. The easiest way to show that is with this chart here, which is taken from an academic paper that was written back in 2014, but there’s actually a lot of academic papers out there on this topic. What it shows is, if you just rank every active equity manager in the world purely by how much risk they take, relative to the benchmark. In other words, on the righthand side, managers that take a lot of risk relative to the benchmark. In other words, they run much more concentrated portfolios and on the lefthand side, almost semi-passive portfolios that run very, very diversified portfolios.

What you see is that you get significant outperformance from those that run concentrated portfolios and underperformance from those that run diversified portfolios. The reason for that is interesting. There’s a lot of analysis down out there, that shows that whilst, on average, half the managers outperform and half the managers underperform versus the index, interestingly, the vast majority of managers outperform in their largest overweight positions. What they tend to do is then destroy value in the rest of the portfolio, i.e., their next set of ideas they haven’t got quite as much conviction in. So quite simply, we go to who we think are the world’s best stock pickers and we say, we can worry about risk management, you don’t need some portfolio fillers in there for that reason, just give us your very best ideas. Maximum of 20 ideas, some only put ten, 12 stocks in there.

Just give us those. We’ll worry about risk in how we blend the managers, that stock pickers today, we just want your very best ideas. It should, therefore, lead to the outperformance that you see on the righthand side. That’s certainly been the case so far and certainly, the case for even longer, where we’ve been doing this in institutional portfolios.

Picking the stock pickers

So, what is it that WTW do? Firstly, we do the manager selection. So, we pick who are those best stock pickers in the world. That’s the job that some retail investors will try and do themselves. The only thing I would say there is that we have a team that’s very large. We have a research team of 60 or 70 people that all they do is go out and research all of the asset managers in the world. They’ll sit with them. They’ll go through their stock examples that are in the portfolio or not in the portfolio. They’ll got through their valuation metrics and the kind of thinking they’ve gone through. Sit in on internal meetings at those managers and really be able to understand what it is that makes them standout from others and why they’re likely to outperform. So that’s the first piece of what we do.

We’re then deciding which of those skilled stock pickers are suited to running highly concentrated ten, 20-stock portfolios. We’re then working with them to create that mandate so they run a separate account, specifically for Alliance Trust and it’s all about wanting them to think about risk in terms of permanent loss of capital over a long period of time, rather than short-term worries of how they’re going to do relative to the peer group of the benchmark. Again, we can worry about that in how we blend the managers and we’ll get them on a good fee as well. We then do the portfolio construction. So, what weightings we give to each of the managers and really, what we’re trying to do is make sure that stock selection drives everything.

So, we don’t want to be running a big style bias. We don’t want to be running a big country bias or industry bias. Overall, we want it to be all about stock selection. Yes, individual managers will have very big biases to some of those things I talked about, but not at the total portfolio level.

[TEN MINUTES]

Then finally, we’re providing oversight on an ongoing basis and saying, okay, everyday when we come in, is this still the best manager lineup that we could have? Have we found some new managers that are even better than the ones that are in place? So that’s the work we’re doing and are we still ensuring that stock selection’s driving everything and that risk management is key and that we’re running this with strong ESG [environment, society, governance] capabilities across the whole piece.

This is what the manager lineup looks like today. Interestingly, this hasn’t changed over the last 12 months, but there has been a little bit of change over the full six-year period. Three of the original managers have come out from the original lineup of eight managers at that particular point in time. We’ve got nine managers here. The eagle-eyed amongst you will recognise that GQG have got two slugs in the pie chart there. That’s because they run two portfolios. So, all of the nine managers run one of these 20-stock, go anywhere portfolios, GQG also run a specialist emerging market equity portfolio as well. Other than that, each of the managers run one of these go-anywhere best ideas 20-stock portfolios. Worth noting that these are not all names that will be known in the retail space.

Part of that is because we’re finding managers from all across the globe that wouldn’t necessarily be in UK retail. So, we just take the top two as an example. On the right-hand side you’ve got Black Creek, who are an organisation based in Toronto in Canada and on the left-hand side, Vulcan Value are based in Birmingham, but not Birmingham in the UK, that’s Birmingham in Alabama. So, there’s just examples of managers that you wouldn’t necessarily think of day-to-day, but for us, they fit very nicely into an overall portfolio. Again, making sure stock selection drives everything, which is shown here on this slide.

That if you look at the portfolio from a top-down perspective and just focus on how it looks relative to the MSCI All-Country World index, that’s the benchmark we tend to refer to, which is a truly global index, you can see that the positions in sector terms are quite small in relative terms versus the benchmark and similarly, we don’t take big country positions and certainly, no big style positions. The one style position that we might typically have, on average, is slightly underweight large-cap, in particular, mega-cap. That’s really just a consequence if you do ask managers to pick their ten to 20 best ideas in the world, it’s on average, unlikely that they’re constantly going to be overweight the largest stocks in the index, that have by definition, performed very well and are the most followed in the world.

Good performance

So how have we done? What’s the performance been like? We’ve shown performance to the end of May 2023 here and since inception is from the date that we started managing the portfolio on 1st April, 2017. So, six years and two months in this particular case. I guess the first thing to note is that we’ve actually outperformed all three objectives of index, the investment trust peer group and the wider peer group, that includes open-ended funds, as well as closed-ended funds. We’ve beaten all three of those over every single period since we’ve been running this portfolio. What you’ll see there is over the last three years, it’s been a very strong period of performance, outperforming the index by 1.3% per annum over the three years to the end of May. The investment trust peer group by nearly 5% per annum over that three-year period and the wider peer group, by some 3% per annum.

Since inception over that full six-year period, it’s been a tougher time for active management generally. You’ll see we’ve outperformed the benchmark, but by less. By 0.3% per annum over that period. The MSCI All-Country World index has actually been one of the best performing indices over that full six-year period because it’s been driven by a small number of very large tech companies that are a very high proportion of the index. Despite that headwind to active management, still outperformed by 0.3% per annum.

You’ll see we’ve outperformed the investment trust peer group over that period by 0.4% per annum, which may not seem that high, but interestingly, if you actually look at the fact that over that six and a bit years, a few of the worst performing investment trusts have just fallen out of that universe. Either because they’ve been reclassified or they’ve been taken over because of poor performance. This inflates the return from the average investment trust. If you allow for who was in the universe in every quarter over that full six-year period, we’ve actually outperformed by 2.2% per annum over those six years or so. So good levels of outperformance, but actually, we’ll talk now about why we’re so excited, why we think the performance is likely to be even stronger over the course of the next few years.

Fundamental growth

This slide really tries to get to that point. In danger of oversimplifying things. We think there are really two ways that you can make money as an investor in public equities. The first one is what we term fundamental growth and that’s the dark purple colour on here. So, what do we mean by that? We mean think of being a private equity investor. You buy this company and you buy 100% of the company and you essentially receive all of the dividends and earnings from that company in totality. If you hold that stock forever, that’s what you’ll receive and whether you’ve done well out of that, your fundamental growth outperformance is whether you’ve picked companies and paid a price that was more attractive than what the earnings and dividends turned out to be.

So, have your stock pickers essentially called it correctly, that the price didn’t fully reflect the future potential for that companies earnings and dividends? So that’s the purple piece, fundamental growth. Then the second bit of return you get, is essentially what Mr Market is willing to pay you for those set of cashflows that you’re getting from the company at any point in time. That will ebb and flow with the markets fear or greed at any particular point in time. Often driven by views on interest rates, inflation, and big top-down factors like that. So that’s really multiple expansion because that’s the price that’s someone’s willing to pay for it. What’s the price earnings multiple on that company at any particular point in time.

What we do is, we break down how much of the return on our portfolio, Alliance Trust, has come from each of those factors over those six years. This is actually to the end of March, 2023, just because we’ve done it on quarterly returns here. Then equally, what’s that been like for the index benchmark, the MSCI All-Country World index. What you’ll see on the left-hand side there is that the vast majority of the returns on Alliance Trust come from fundamental growth. In other words, the stock pickers have correctly been called which companies are actually going to be producing better than expected earnings and dividends and a very small part has come from multiple expansion. In fact, that’s actually slightly detracted value.

Whereas, on the index, a smaller part has come from fundamental growth and a larger part has come from this multiple expansion. That’s understandable because the index has been dominated by some of these tech companies that have seen their multiples expand quite significantly over that six-year period. The ‘so what’ to this is that over the long-term, on the righthand side, equity market returns are completely driven by the purpose piece. In the short to medium-term, they’ll be driven by a combination of the two. In the long-term, it’s all about the purple. So, we sit here today, very excited about our portfolio because the managers have been calling the companies’ fundamentals absolutely correctly, it’s just that hasn’t necessarily come through in share prices in every case so far.

So, if you just isolate that purple piece, what you’ll see is that we’ve outperformed by some 1.8% per annum, in fundamental growth terms, versus the index over the full six-year period and 6.8% per annum over the last three years. So, we sit here and think there’s a lot of latent value in the portfolio, ready to come through with this fundamental growth coming through in share prices eventually.

So where does that leave us in terms of how we think about the portfolio? Well, yes from a bottom-up perspective, we’re very excited about the potential for significant outperformance from here. Equally, it’s important that we think about some of the macro factors that are going on in the world in terms of how we feel about the absolute returns from not only our portfolio, but equity markets at large. It’s fair to say that bond markets are currently pricing in a recession, equity markets are not really pricing in much of a recession.

[TWENTY MINUTES]

So, we’ve got some caution at a top-down level about where equities are placed and hence, we’re at the bottom end of our usual gearing range on the portfolio.

So very excited from a bottom-up perspective, got some caution from a top-down perspective. Really genuinely excited about the opportunity for relative outperformance at this point because we do think in an environment that might see recession, that seeing higher interest rates and the like, you’ll actually to see a lot more differentiation between the real winners in that versus the losers. It will be the ones with the strong fundamentals that do well. As we’ve just talked about in the previous two slides, that’s where our portfolio looks particularly attractive.

Dividend hero

I mentioned we do all of this with a backdrop of looking to increase dividends year-on-year and we’ve certainly been able to achieve that for a very long period of time. Interestingly, of all the AIC Dividend Heroes, we’ve got the highest five-year growth in dividends to the end of 2022 and actually, 2022 itself, saw a 26% increase in dividends from the year before. So again, a good story here and at the end of 2022, that was a dividend yield of 2.5% on the portfolio.

So just to finish off with a quick summary. The key things that I think are worth leaving you with. Firstly, over those six years and two months, we’ve seen a cumulative total shareholder return in excess of 60%. We’ve seen significant outperformance of both the benchmark, by 5% over the last three years and the investment trust peer group of 15% or a lot more, if you allow for those that have dropped out of the peer group, as I mentioned earlier. We bring a lot of ESG credentials to this and we’ve engaged with over 100 companies over the course of the last calendar year, to improve each of their E, S and G credentials. We’re a dividend hero that’s had the highest growth over the last five years and we’re really genuinely excited about the latent value in the portfolio and the fact that the way markets are looking today, is a terrific opportunity for a bottom-up stock picker that isn’t really running any style bias or geography or sector bias in the portfolio. At that point, I’ll stop and take some of your questions, Gavin.

Performance target

Gavin Lumsden:

Thanks very much, Craig. Had lots of questions coming in from the audience, so thank you very much. Do keep them coming in, we’ll get round to them later. One question was just simply asked in terms of timing. It’s basically a three-way split with these shows. Craig’s been speaking for just over 20 minutes, I’ll talk to him now, for 15, 20 minutes and then we’ll go over to your Q&A in the last 20 minutes or so of the show. So, Craig, my first question, looking at performance, currently, the latest three-year figures, the ones that you weren’t actually talking about, but the latest ones I’ve seen show that the trust is 5% ahead over its benchmark over three years, which is good. You do seem to find it difficult to deliver the target of beating the MSCI index by 2% a year. That’s since you took it over six years ago, I’m curious as to why that is and what does that say about Alliance Trust?

Craig Baker:

I’d bring out a couple of things on that, Gavin. So first and foremost, our objective is to produce strong real returns with a rising dividend. We said at outset, over the very long-term, if we achieve those objectives, over the very long-term, we think that would mean we could probably outperform the MSCI All-Country World index by around 2% per annum. Now, that was a stretching objective, but we think over the very long-term, we can achieve that. We’ve actually achieved that in our institutional portfolios that go back even further than the time we’ve been running Alliance Trust. For Alliance Trust, we’re close to that over three years, but not there over the full six-year period. It’s interesting. That has been one of the hardest periods in history for active managers to beat the index, because the index has been one of the best types of portfolios you could have created with a very concentrated weighting to the tech sector that’s actually run and led the market through that period.

We’ve always said that there will be periods where it’s actually quite easy to beat the index by 2% per annum and there’ll be periods where it’s incredibly hard to beat the index by 2% per annum. Over the long-term it’s tough, but we think we can do it. The first four years or so of our tenure, were one of the hardest periods to do that. So yes, we haven’t per annum outperformance, but we have significantly outperformed everyone else who’s been trying to do exactly that because it has been a particularly difficult period.

More about the fund managers

Gavin Lumsden:

You say you’re style neutral. So, I wonder if you could quickly run through the nine managers and say where they fall on the other growth versus value divide? It may be worth having a look at slide six.

Craig Baker:

If we go clockwise round the wheel from 1 o’clock and we’ll start with Black Creek. So Black Creek, based in Canada. They’re really looking for market leaders that are significantly undervalued. So, you’d think of them as a value-oriented manager, but they are starting with niche sectors and looking for who’s the world leading brand essentially, in that area, that looks cheap. So those are the kinds of companies that you find tend to be a bit more down the cap spectrum, but are looking for ones that look cheap on that basis.

You’ve then got GQG Partners. That stands for Global Quality Growth. So, the clue there is, they are looking for quality growth, but their definition of quality growth is all around visibility and quality of the cashflows. So, they can sometimes be in sectors you might think of as a bit more value oriented. So, for example, they were heavily into technology going into the backend of 2021. They switched into energy, thinking that actually, the cashflows are going to be quite high quality for a number of energy companies. They were a little bit early in that, but then did incredibly well in 2022 when the markets switched from being led by technology to being led by energy. Then they switched back into some of those in 2023, back into some of the companies they were in before. So, they’re a bit more of an eclectic manager, that will move around.

Jupiter, a classic value manager focusing on quality franchises that look very cheap. Lyrical, also a value manager. US biased in their portfolio, but more down the cap spectrum.

Metropolis, value and quality. So, they tend to look for quality type companies and then, looking for the cheapest within that. They tend to have more of a private equity mindset. That was their backdrop, so they think very long-term about the companies and what they’re worth.

Gavin Lumsden:

They’re based in the UK.

Craig Baker:

Metropolis are based in the UK, absolutely. Lyrical, based in the US, Jupiter based in the UK. GQG in Florida.

Sands Capital, US based growth manager, but they’re much more into what are going to be some companies with genuine secular growth that are seeing significant changes to their industry and are going to benefit from some real tailwinds over the next ten years or so.

SGA, a growth manager, but much more classic compounders, bigger names that you would know quite well, that they think can continue to produce the sustainable growth that they’ve achieved in the past.

Veritas, London based. A bit more thematic and quality driven.

Then Vulcan Value, they are value in a sense, but they start with quality companies and then looking for cheap ones amongst them. Whereas someone like a Lyrical would be starting with the cheapest part of the universe and then looking for quality. You end up with very different companies, even though both have got quality and value elements to what they do.

Gavin Lumsden:

Brilliant, that’s really helpful. So then, just looking at three of those names. You’ve mentioned that GQG are running an emerging markets portfolio or stocks, as well as a global one. Why do Veritas, Black Creek and GQG have more than the other six? What’s special about them?

[THIRTY MINUTES]

Craig Baker:

The weightings change over time. There’s no black box in here about working out what the weightings are. We’ll start with the principle of, why wouldn’t you be equally weighted to all of the managers?  There are, sometimes, good reasons from a bottom-up perspective. So it could be that some of the managers tend to be a bit more large-cap oriented and quality biased. You might have more with a manager like that, than a more mid or small-cap oriented value driven principle. Then secondly, how do we make sure that stock selection is driving everything at the particular point in time. So, you’ll be changing your weights at those times. GQG are very much in the large-cap quality growth and they will move the portfolio around. They currently look a bit different from some of the others.

They certainly were the only ones that were really heavily into energy, for example, at a particular point in time and they’ve performed very well. So, all of those things together, they’re a reasonably large weighting. Veritas actually, much more quality biases. So, because we talked about some of the concerns from a top-down perspective, about whether markets could see a bit of a selloff from here, they’re quite a good ballast to the portfolio, that would do relatively well in such a scenario. Then Black Creek have performed particularly well in recent times. Actually, again, look a bit different from the rest of the portfolio. A bit more overweight Japan versus the others. So, when you actually blend the portfolio together, it comes out looking much more like the benchmark on a top-down perspective and very different on a stock selection perspective. That’s what we’re trying to achieve.

How often do you change fund managers?

Gavin Lumsden:

Getting some good questions coming in from the audience and there’s a lot of interest in this monitoring and rebalancing that you’re doing. How often do you change fund managers?  How much time do you give long-term investors if they’re underperforming?

Craig Baker:

The ideal scenario is that we never have to change a manager and they just continue to achieve everything we want them to. That doesn’t mean they outperform in every quarter or year. In fact, we’d be very worried if all our managers were outperforming at exactly the same time. That would imply that they could underperform at the same time because they’ve probably got a similar style if that’s the case. Now, we want them all to be outperforming over the long-term, but not necessarily all in the short-term. There are reasons to change managers at times. Firstly, the important thing is that we won’t change a manager purely because they’ve underperformed. In fact, all other things being equal, if nothing’s changed at the manager, we still think they’re highly skilled and they’ve underperformed, we’d probably giving them some more money.

We’d be taking profits from the managers that have done particularly well because their style’s been in favour because you tend to get styles coming in and out of favour over time. So, all other things being equal, we won’t do it on performance alone. Clearly, we will sometimes get our call on the skill of the manager wrong. So, you’re always questioning that. If a manager’s underperformed, what we’re trying to dig into is, have they actually been calling the fundamentals of the companies that they’re investing in?  Some of that fundamental growth versus multiple expansion I talked about earlier. Have they been calling the fundamentals correctly and it just hasn’t yet come through in share prices or have they actually been calling the fundamentals poorly on their companies. We have a different view as to which one makes us more or less worried about the skill.

What is ‘multiple expansion’?

Gavin Lumsden:

That’s the second time you’ve used the phrase ‘multiple expansion’ and we have actually got a question from the audience saying, “What do you mean?”

Craig Baker:

So essentially, if you look at the price of a company, you can break it down to what’s their earnings per share growth at a particular point in time and what multiple is the price over that? So, the price to earnings multiple. You’ll see that quoted in any statistics around a particular company. What we’re saying is that sometimes, the market is just willing to pay a lot more for the earnings that they’re receiving from a company in one sector than they are in another sector. What we saw, for example, in the last few years is that people are prepared to pay more and more and more for the earnings that they receiving in the technology sector, in a belief that it will continue to growth its earning massively forevermore. At some point you question whether that goes too far. So, price earnings multiples will go up and down through time, depending on how the market feels about that particular sector of the market.

Gavin Lumsden:

So, what you were saying earlier is that Alliance Trust has been generating most of its returns from the fundamentals. So, revenues and profits are increasing in the companies you’re invested in, rather than simply in share prices, where basically, investors are just paying more for the same.

Craig Baker:

Exactly. Over the long-term, that price earnings multiple will go around an average. So, what really drives returns in the long-term is, are you able to identify the companies that are able to beat expectations on earnings. That’s what has been the case so far in our portfolio. We’ll be challenging the managers on that when they’ve underperformed. We are prepared to change managers when something’s changed or it could be as simple as we’ve found an even better idea. There’s nothing changed at the manager, we still like them, but we don’t want to end up with 15 managers in the portfolio, so we’ll make a change.

Do you have managers in reserve?

Gavin Lumsden:

Do you have a long or shortlist or managers in reserve?

Craig Baker:

We do. There’s a number of managers that we use in other portfolios that we run like Alliance Trust on the institutional side. So, there’s a lot of managers that we know, that can run these concentrated 20 stock portfolios for us and yes, we could move any of those into the portfolio at any time. Also, our research team that I mentioned that are out there researching managers every day, are constantly coming to us, and saying, we found this new manager that’s really exciting. So, we’re balancing the advantage of putting in a great new idea and the cost of changing an existing idea.

Are you quantitative or qualitative?

Gavin Lumsden:

With reference to that team that you have of analysts who are assessing fund managers and meeting them. I’m just curious as to what extent is your judgement on the managers based on data and how much is based on more qualitative, impressionistic ideas from meeting them in person?

Craig Baker:

It’s definitely both. So, my line to the research team is that quantitative analysis is fantastic for throwing up questions. It’s pretty useful at providing answers. So, the way we use the data is that it really does come up with some insights into how the manager’s typically done in certain types of environments, historically, so that you can start asking questions, why has that been the case? Is that what we’d expect in a similar environment going forward? Why have they outperformed by a certain amount over the long-term? Why have they struggled in certain periods. So, it’s useful for that, but ultimately, it comes down to what’s their competitive edge against other asset managers that are all trying to do the same? So, sitting with them, asking them about stock ideas.

Asking lots of managers about the same stocks and understanding which ones have actually got more insight when you challenge them than others. A lot of them will give you something that you can just read in a sell-side broker note. Are they giving you something different of insight that they’ve got into the companies that others haven’t. So that’s ultimately where we make our decisions, but the quantitative analysis is really important.

Why is Alphabet your top stock?

Gavin Lumsden:

Thanks for that. My last question because I’ve got to get onto the viewers’ questions in a minute. Just looking at the stocks. Perhaps turn to slide 20, Alphabet was your top stock holding at 5% in May. Is it held by more than one of the managers? That’s quite a big chunk of money for such a diversified portfolio.

Craig Baker:

You’re right. So, if you look at the third row down, this is the 12 stocks that have got the biggest relative position versus the index weight. So, if you take Alphabet, it says where it’s located in the United States which sector it’s in. How many of our stock pickers. So, remember there are nine stock pickers. How many of them are owning it at this particular point in time and how overweight or underweight a stock is relative to the benchmark. You’ll see there, five of our stock pickers own Alphabet at the moment. Five actually own Visa. You’ll see four own Amazon, three own HDFC Bank and Mastercard. Then most of the others are owned by one manager only. Certainly, outside of the top 12, once you go through the rest of the portfolio, virtually every stock is only owned by one stock picker. There are definitely a few stocks that can be owned by a number of them. That’s fine.

Gavin Lumsden:

What does that say about the attractions of Alphabet or the others?

Craig Baker:

I think it means it’s a pretty exciting idea. If you’ve got people that look at the world very, very differently and all of these managers look at the world very differently and you’ve got some value managers and some growth managers, both finding Alphabet attractive, coming at the problem from a different perspective. That really means that we’re very comfortable being overweight a stock where that’s the case.

How many stocks does Alliance hold?

Gavin Lumsden:

Thanks for that, Craig. I’m now going to move on to your questions. So do send them in, but we’ve got a good number already. Go straight to one from Robin Curry Lindal, who’s actually asking-, apologies Robin, maybe this wasn’t your question. Yes, it was. He just wanted to clarify that you’ve got these nine managers, you’re basically asking for up to 20 best stock ideas.  So that means Alliance Trust as an overall portfolio has how many holdings?

[FORTY MINUTES]

Craig Baker:

So round 180 stocks in total.

Gavin Lumsden:

So, it is diversified, but made up through high conviction stock picks?

Craig Baker:

Exactly. So, it’s a diversified portfolio, but every stock that’s in there is someone’s top 20 ideas and that’s the big difference to a single manager approach that’s got 100 plus stocks in it.

How expensive is Alliance Trust?

Gavin Lumsden:

Okay. Right at the beginning, you mentioned the issue of multimanager, you’re not a fund of funds, but the idea of investing other funds, it could be expensive. How much to investors pay to invest in this multimanager approach at Alliance Trust?

Craig Baker:

So, the OCR [ongoing charges ratio] on this is just over 0.6% [of assets] per annum. So, it’s good value in that sense.

Have you beaten a tracker?

Gavin Lumsden:

That was a question from one of the audience and then there’s a number of questions coming in looking at performance over the six years and wondering how you’ve done against at index tracker, an exchange traded fund that would be following the same MSCI index. Looking at the performance over the six years, why shouldn’t people buy that instead?

Craig Baker:

So, we’ve outperformed it, is I guess, the first answer to that. We’ve beaten it by about 0.6% to 0.7% per annum after all costs. So, I would say that’s a good level of outperformance. That’s been in a period where I think everyone would say passive has done better than it would typically do because of this concentration in the portfolio. So, if you think that you might not have the market led by such a small number of stocks that are very, very large over the course of the next six and a bit years versus the last six and a bit years, you’d actually probably want to be in active management going forward, rather than passive management. In the toughest period we’ve had, we’ve still managed to outperform passive. I would say that that’s a very good reason to be invested in Alliance Trust today.

How do you manage currency risk?

Gavin Lumsden:

Alan Greenall is picking up on the amount that Alliance Trust has invested in the US and North America. You showed earlier on, you’re actually underweight the benchmark, but it’s 57% for the trust. So, Alan’s asking, ‘Given the weakness of the dollar over the last year and the reduction in the pound terms of the value of these stocks, are you managing currency risk and if so, how?’

Craig Baker:

So, we typically don’t hedge the currency. The index return is also unhedged. We look quite similar to the exposure that you get by buying a global equity trust, whether it be passive or other active ones, against the MSCI All-Country World index. So, you would have a 50%-to-60%-dollar exposure in that sense. That’s clearly been a positive over that full period, dollar versus sterling, dollar has appreciated over that period of time.

You have a lot in the US?

Gavin Lumsden:

In terms of the actual overall exposure to North America and the US, are you-, notwithstanding it is underweight your benchmark, but are you comfortable with that level?

Craig Baker:

We are. Ultimately, it is a huge market that’s got opportunities to get access to real growth sectors in the US, that you don’t necessarily get in the UK, for example or other areas of the world. So, we definitely don’t have a problem with a large portion of the portfolio being in that. Of course, it’s been the best performing market for a number of years now. That’s said, increasingly, the stock pickers are finding more and more interesting ideas outside of the US, hence why they are underweight, on average. We make sure that that doesn’t dominate. We want the stock selection to drive everything. So, this will always be relatively large weighting in the US, but we think that’s appropriate, given the opportunity set there. Ultimately, the US is 60% of the world market capitalisation of the world.

ESG and tobacco stocks

Gavin Lumsden:

There’re a few questions around the issue of sustainable investing and ESG, environment, society, governance. Alan Ramsdale is picking up on the portfolio’s positions in tobacco stocks. ‘As someone who only invests in trust funds that exclude tobacco, I look forward to Alliance divesting in these positions before I would take a position.’ Given Willis Towers Watson’s reference to ESG and tobacco’s extreme negative, do you intend to divest from these companies?  That’s essentially what Alan’s asking.

Craig Baker:

Ultimately, the board have a say on the specific exclusions that there are set out and we will have discussions with them about where we think that’s in the financial interests of investors to have those. We start with the principle of, we would rather have engagement over exclusions. Ultimately, exclusions don’t do anything to change the problem. In fact, having somewhat a shareholder that really cares about ESG issues, excluding something just passes that stock on to someone who maybe doesn’t care about those things and the change doesn’t necessarily happen. So, we would rather, actually, use engagement to move things forward in those areas. That said, there are some sectors where you think engagement’s unlikely to have major change.

We have exclusions like controversial weapons, thermal coal, and tar sands. That’s partly because you can’t really tell a thermal coal plant to shut themselves down. That is what they do. Partly because we actually think there’s a financial argument, given what’s happening in regulation with net zero and the like, of being ahead of that decarbonisation path from a financial perspective. Currently, tobacco is not an exclusion that’s in the portfolio. The board and we continue to monitor that, but the financial case of excluding the thermal coal, oil sands, has been stronger than it has for tobacco, which of course has been one of the best performing sectors over the very long-term.

What does EOS do for you?

Gavin Lumsden:

Barry Faith just picks up on your reference to a company that’s helping you in this area called EOS. I think you said they were part of another fund management group called Federated Hermes. What does EOS stand for and what do they do?

Craig Baker:

So, this is their Equity Ownership Service or Engagement Overlay Service. So you can talk about it in a number of ways, but essentially, what they do is they will go to each of the companies that we’re invested in and they will, on behalf of all of the people that are signed up to that and they’ve got a trillion or so dollars that ask EOS to engage on their behalf, they can have big impact in going to these companies and saying we think to be best in class under E, S and G factors, you need to do X, Y and Z. They will actually put resolutions to AGMs at companies, as appropriate. For example, they tend to lead on a number of the Climate Action 100 initiatives that are out there. So that’s the 125 largest carbon emitters in the world, something like that. They will go to each of those and put a plan in place of how to decarbonise and how that would be in the best interests of shareholders. So those are the kinds of things that they’re doing on our behalf, but also, the behalf of a number of others that are signed up to the EOS service.

Gavin Lumsden:

Helping you vote and get your views across?

Craig Baker:

On voting, they propose to the underlying stock pickers how to vote. The stock pickers don’t have to follow those recommendations, but they have to tell us why they’re not and there could be good reasons, if they know the company even better. Generally, they’ll be following the recommendations from EOS, but EOS will definitely be doing the engagement.

How much should I hold in Alliance Trust?

Gavin Lumsden:

Barry Johnson has a question. Moving on to a different topic, but going back to this idea of Alliance Trust could be a one-stop-shop for busy investors. He asks, ‘As a core holding to a portfolio, what percentage approximately, do you think Alliance Trust should occupy?’

Craig Baker:

Well, it’s an interesting question because it really does depend on the individual is the honest answer. There is no reason why it couldn’t be 100% of your equity portfolio. It’s pretty close to that for me. This is finding the best stock pickers in the world and they spend 100% of their day doing this. I think I’m going to be better placed to do that than them. So having a blend of those in a way that isn’t biased towards a particular style, I think’s very attractive. So, I would say, for the majority of people, we could make up 100% of their equity portfolio. Clearly, the more sophisticated the investor is, they may well have particular wishes to be in a thematic area and have that alongside this or a really highly concentrated single portfolio that’s trying to beat the benchmark by a very high amount and wants to put a small amount in that and have this core. For me, it could be a very high proportion of a typical retail investor’s portfolio, bit it often makes up 100% of our institutional portfolios. So not reason why it couldn’t for a retail investor.

[FIFTY MINUTES]

Active share

Gavin Lumsden:

Richard Saunders asks, ‘What is the active share of the Alliance Trust portfolio?’

Craig Baker:

So active share is an assessment of how different the portfolio looks to the benchmark at a stock selection level. So, if you had an active share of 100%, that means you don’t own anything that’s in the benchmark. You look 100% different to the benchmark. If you’ve got an active share of zero, that means you’re exactly invested in line with the benchmark. In other words, you’re a passive tracker.

Gavin Lumsden:

So those global exchange traded funds that the viewer was asking about earlier on, they’ll be near zero.

Craig Baker:

Exactly. We’re at 80% at the total portfolio level. You’d be at 95%-plus for each of the underlying managers. That when you blend it together, you still get a highly active portfolio, which is why we can significantly outperform, but you do that with a nice, diversified portfolio of stocks.

Gavin Lumsden:

It is very interesting, your job of blending different managers together. In terms of the conviction, you’ve said earlier on the basic high conviction portfolios work best. So, I just wondered, have you ever considered or ever done any analysis into what would happen if you asked the managers to choose ten top stocks rather than 20?

Craig Baker:

Yes, we have. The first thing to say is there’s no exact right answer here. I think the important thing is that at some point managers start putting in stocks that they’ve got less conviction in and/or they’ve got no conviction in, they’re just putting them there for risk control purposes. It’s that we’re trying to avoid. Whether the right number of 20, 15 or ten honestly, is different for each manager. If you actually look at our line-up, some of the managers are holding ten, 11, 12 stocks and some of them are holding 19 or 20. It suits their approach differently for each manager. That said, we have run some portfolios with a maximum of ten in the past. So, eight, nine stocks most of the time. We felt over time that we feel more comfortable at the 20 limit than the ten. You get some very biased portfolios on all factors other than stock selection when you run a really concentrated portfolio and you would end up with needing quite a few more managers in order to make a nice balanced portfolio with stock selection driving everything.

Do you go into cash when markets are toppy?

Gavin Lumsden:

So, 20’s the right balance then. It’s an equity fund fundamentally, it’s investing in shares through these fund managers, but John Gilbert asks, ‘Will you go heavily into cash when stock markets are euphoric?’

Craig Baker:

The simple answer is, no. We run this as a close to fully invested portfolio. I say close to fully invested. The managers can go up to 10% in cash. They typically don’t. Now, there would be scenarios where they do, but mostly they’re running cash levels of about 3% or something like that help them be able to trade the portfolio as and when they want. Technically, they could go up to 10% in cash. We can hold cash centrally and we tend to hold small amounts to be able to do buybacks, if required or something like that, but typically, you’d see an overall cash level of about 3% or 4%.

Are you optimistic?

Gavin Lumsden:

Thinking of your overall slightly cautious view of the world at the moment, understandable. Just wondering recent economic data from the US, where you are so largely invested, were quite good with core inflation lower, economic growth first quarter of the year bit better than initially thought. What was your response to the unfolding economic date, particularly from the US?

Craig Baker:

Firstly, I’d just say that one of the issues is that we don’t think many people are very good at calling big macro themes. Even when they do, the timing can be slightly out and that can cause a big period of pain. That’s exactly why we’ve designed a portfolio here that should do well. Almost regardless of what happens from the big economic pieces. Not because we don’t have a view, but because we have more confidence in being able to put together some stock pickers in a portfolio that will outperform in most environments than we do on just making big calls on whether equities versus cash look attractive or whether value versus growth looks attractive or whether large-cap versus small-cap looks attractive or one country versus another.

So, we’ve made sure that the answer to that question doesn’t matter too much for the outcomes of the portfolio. That said, on balance we are a little bit cautious about equities as we stand. Agree that there’s lots of positives to look at in what’s been happening economy wise. If you look at the way markets are pricing things in, they are pretty much pricing in the Goldilocks scenario. Now that Goldilocks scenario may well be the one that happens, but you have the probability weight all of the scenarios that could happen and we think that the market has put a very low probability on a recessionary outcome, inflation staying higher for longer. Those kinds of things that could easily happen. So, on balance, we’re just a little bit cautious from that perspective.

Investment themes

Gavin Lumsden:

I know you don’t look at the portfolio, you’re looking at it from a bottom-up point of view. You appoint the managers and you work from a stock up basis. Looking at the portfolio, thinking about Alphabet being one of the bigger positions, what are some of the longer-term themes that are evident from what you’re holding?

Craig Baker:

Interestingly, if you look at what’s been driving a lot of the market recently, it’s been AI and a number of companies that are in that space. Whether it be the likes of a Microsoft of whether it be the likes of the semiconductor players and so on and so forth, we’ve actually benefited from a number of those things. We’re interested in the financial space, which has been an interesting area over recent months. We’ve actually got very little in traditional banks. So, in financials, we’ve got payment processing companies, we’ve got the likes of Visa and Mastercard, PayPal and a few other things. We’ve got some emerging market banks like HDFC Bank in India and we’ve got a couple of asset managers, private equity managers and the like. Nothing in the US regional banks, for example. Have nothing in that as well.

So, there’s a few of those themes running through it. Energy I mentioned an interesting one that we had very little in energy until backend of 2021 and then cycled into that area through GQG in particular. That was very beneficial. They still hold a number of those companies, but less than was before. So, there’s a few examples of some things that are in the portfolio.

What is the exposure to China?

Gavin Lumsden:

Thanks, Craig. A few minutes left. I’m just going to pick up on a couple more questions. So, if you’ve got a question, now’s the time to see if you can get it in and I’ll try and pick it up. We talked a bit about the US what about-, anonymous attendee, someone’s asking, ‘What is the exposure to China?’

Craig Baker:

China, actually relatively limited today. There have been periods where we’ve had more in China than we do at the moment. You would get that exposure, both through the emerging market portfolio, from GQG. They’re actually not as positive on China at the moment. So not much in that portfolio. Also, the opportunity for others to invest wherever they want to go. So, some of them have held some Chinese companies, but actually very small exposure as of today compared to periods before, where we did have it.

Managing the share price discount

Gavin Lumsden:

Relating back to performance, Howard Ormesher picks up on the discount. Currently the shares are trading around 7% below their asset value and Howard notes: ‘The discount seems quite stable, how do you manage this? Do you actively buy shares in the trust to keep this stable when markets are volatile?’

Craig Baker:

Good point. So, the discount has typically been around the 5.5% to 6% range and then very recently, has gone out to about 7% as you say, but very recently the rest of the sector’s gone out a lot more than that. So, the rest of the sector’s at 15% discount and we’re at 7%. Yes, we do, do some buybacks. That’s driven by the board. There are buybacks that take place. We haven’t actually had to do that many buybacks relative to some other trusts, partly because of the attractive proposition strategically, but also because of our very strong performance over the last three years or so. So, there’s actually quite a lot of demand for the trust. Yes, the board makes sure that they do buybacks as appropriate, to ensure that helps shareholders have a more stable outcome. Of course, buying back shares at a significant discount actually improves the net asset value of the trust, which is beneficial for shareholders as well.

Gavin Lumsden:

Last question before we have to go, but of a clarification really. Lesley Hall asked: ‘The performance figures that we’ve been talking about throughout the programme, have all the figures for performance on the slides been after charges?’

Craig Baker:

Yes, that’s after-, so the net asset value ones are after all the costs of both WTW’s costs, the underlying stock pickers’ fees, and board costs and so on and so forth. That’s after everything.

Gavin Lumsden:

Lesley, I hope that reassures you and answers your question. To all of you, thanks so much for your questions, but I’m afraid that’s all we have time for today, but I hope what you’ve heard has whetted your appetite for more equity investments. The final piece of housekeeping, as ever please complete the feedback survey. In the meantime, thank you so much to Craig for joining us today and to look out for me of our investment trust programmes. Goodbye for now, happy investing.