Give Alliance Trust another chance

Alliance Trust building
Alliance Trust: reasonable cost, progressive dividend

We all know that investing in funds can be a complicated task. You’re encouraged by people like me to diversify your funds (and underlying “exposure” to asset classes), but the actual job of picking a fund can sometimes make you feel a little like Solomon presented with his mythical choices. Which one, when and for how long? Because of all this complexity, many investors prefer to keep it simple, and pick one core fund in which they sit tight for the long term. If all goes to plan, this fund gives exposure to a range of geographies and themes.

Typically, this exercise is most relevant for equities – you’ll probably have to find a different one-size-fits-all manager for bonds and alternatives. Within the world of equities, the options are legion for a core fund. But if we narrow this down to only listed global equity funds, the choice is reduced to around 22 funds, including stalwarts such as Scottish Mortgage and RIT Capital Partners.

We can then narrow that list further, because many global funds tend to have a particular theme or style – growth and tech stocks in the case of Scottish Mortgage for example, or a range of public and private equities and some alternatives with RIT Capital. Some are also relatively small and less liquid. Which leaves us with only a few choices, including the well-known Alliance Trust (LSE: ATST).

The Dundee-based financial services group has had a difficult few years. For years, Alliance had run its own money, deciding how it would allocate between geographies, styles and themes. Unfortunately, over the last few years this approach came rather unstuck. Performance was lacklustre, costs seemed to keep increasing, and antsy shareholders begun pushing for change.

As a result, the group changed tack last year and has decided to embrace the “fund-of-funds” approach, by working with a research team run out of consultants Willis Towers Watson. Alliance has also sold off its third-party asset management arm, and many think that its stockbroking business Alliance Trust Savings might be on the block.

So, does Alliance’s new approach look like it might work? I’d say a guarded yes. It recently announced a slate of eight managers from around the world who will manage the fund’s portfolio. Each manager will run a focused portfolio consisting of around 20 stocks, representing their best ideas on a global basis. Crucially, the initial capital is expected to be equally weighted between the managers. The managers have a range of investment styles, and none is constrained by index weightings.

A number of key statistics stand out when looking at the fund. At Alliance’s current size, the total annual costs of the fund are expected to be around 0.65% per annum, which is reasonable. The fund is keen to hang on to its track record for increasing the dividend for 48 consecutive years, which implies that the dividend must stay around the 2% level.

Lastly, ATS has also managed to rid itself of major shareholder Elliott Advisers, via a share buyback process over five tranches at a 4.75% discount to the prevailing net asset value (NAV). This sounds like a good deal, although it will make the fund appreciably smaller, which in turn might add a bit to overall costs. It might also result in an uplift of about 1% to NAV.

The discount might tighten a bit over the next year or so, especially if the fund’s new approach is successful, though I still would have liked to have seen some mechanism which allowed private shareholders to get out close to NAV. But overall, I think this is an impressive reboot, and ordinary investors should actively consider making Alliance one of their core investments for the long term.

In the news this week…

• Jupiter has become the first listed asset-management company in Europe to stop passing the cost of research it purchases from investment banks and brokers on to the funds it runs (and hence to investors in those funds), says Madison Marriage in the Financial Times. The firm will instead absorb the fees itself from 2018, which is expected to push up its costs by £5m. Jupiter has said that it will not change the fees it charges clients, presumably to reassure clients that it will not try to recover these research costs by raising its annual management charge.

Jupiter follows in the footsteps of peers such as Woodford Investment Management, Baillie Gifford and M&G, all of which are unlisted. New European rules, which are set to come into effect in 2018, will ban fund companies from bundling together the fees that they pay to banks and brokers for research and trading, as is common in the industry.

• Warren Buffett, the world’s best-known investor, has attacked hedge funds in his latest letter to investors, arguing that their highly paid managers fail to beat the market. Wealthy investors seem happy to pay the high fees associated with hedge funds “in the belief that they were getting special advice beyond the reach of ordinary people”, says Buffett, whose investment firm Berkshire Hathaway has returned an average of 20.8% per year since 1965, compared with 9.7% for the S&P 500. Yet a tracker fund beats most active managers “for a fraction of the cost”. “Failure to see this cost wealthy backers more than £80bn in the past decade.”