Last week I discussed how 2023’s markets were dominated by a ‘magnificent seven’ of mega-cap US stocks thought to be beneficiaries of the advances in artificial intelligence (AI). The MSCI All Countries World Index (MSCI ACWI) returned 15.3% over the year but the concentration of returns from just a handful of stocks made that a challenging target to beat.

In the global investment companies sector, there was a considerable spread of returns. Just five of 13 funds beat the index with Manchester & London (MNL ) topping the peer group. However, ranking second with an underlying investment return of 21.6% and total share price return of 20.2% was Alliance Trust (ATST ).

Since it adopted a multi-manager approach in April 2017 under Willis Towers Watson (WTW), Alliance Trust can point to both the net asset value (NAV) of its investments and the share price have beaten the MSCI ACWI benchmark. This is a remarkable turnaround for a trust that seemed to have lost its way. I wrote about the challenge that ATST faced at the time and noted that its fate would be judged solely on its future performance.

Back at the revamp, Alliance Trust had a market value of £2.5bn, but part of my concern was that its newly introduced commitment to keep the discount in low single figures would lead to considerable further shrinkage of its assets. It has bought back almost 80m shares since then, taking about £930m off the NAV.

However, an investment return of 85% from April 2017 to 31 December 2023 combined with successful share price discount control has ensured the trust is still one of the largest in the sector with a market value above £3.1bn. Pleasingly, the share buybacks seem to have become less frequent.

Alliance Trust has achieved this feat because its manager of managers approach gives it exposure to the best ideas of investors with a range of styles, which helps to reduce the volatility of its returns. It can – and at the end of November it did –  have exposure to five of the ‘Magnificent Seven’ companies while also holding value stocks.

WTW manages the portfolio’s overall risk and oversees the choice of managers. One of its jobs now is to decide whether Ben Whitmore’s upcoming departure from Jupiter merits some reallocation of his slice of the portfolio to another manager.

I am increasingly convinced that Alliance Trust is an ideal core investment for long-term savers. It is pulling away from rivals such as F&C (FCIT) and Witan (WTAN ). There is no reason why it should not turn out above-average returns in 2024 too.

In third place over 2023 was AVI Global Trust (AGT ), which I wrote about recently. It is commendable how it managed to beat the MSCI ACWI without holding any of the tech mega-caps. More than most funds, AGT’s returns are driven by the actions of its managers – as they encourage companies to narrow the discount between their share prices and the value of the underlying portfolio.

At the other end of the table was Lindsell Train (LTI ), knocked by a downward revaluation of its stake in its investment manager. For years, when I was writing articles warning of the dangers of buying trusts on big premiums, LTI was the example that I used. Its premium reached a peak in May/June 2019, but the share price is now about 58% lower, and the trust is trading on an 18% discount. This is probably a recovery play now, but it is a bit of a strange beast and hard to pigeonhole in a portfolio.

Another disappointment in 2023 was Scottish Mortgage (SMT ). Its 10.1% NAV return ranked it tenth in the peer group. Falling government bond yields on the back of lower inflation did provide a fillip towards the end of the year, and the discount did narrow a little, but over two years on from the big slide in its share price, investors remain frustrated.

Investors may be hoping for exits from the unlisted portfolio, but it feels to me as though the flotation market will remain lacklustre for much of the year, especially given the looming US election.

At least the end-of-2023 rally in Scottish Mortgage’s listed stocks helped rebalance the portfolio so that unlisted companies account for 27.3% of the portfolio – below the 30% maximum allocation that had been breached at the end of October.

Scottish Mortgage does have some exposure to the magnificent seven tech stocks, but it needs the growth stock recovery to be sustained and to broaden out in 2024. Falling interest rates will help with that. At some point, SMT may be the best-performing trust in this sector once again. Hopefully, though, investors are better educated about the risk that comes with that and those that cannot stomach that will take a closer look at some of the alternatives.

James Carthew is head of research at QuotedData.

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