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Alliance’s reinvention pays off

This trust is in better shape than before, says David C Stevenson – and could soon become a core holding for investors.

This trust is in better shape than before, and could soon become a core holding for investors.

This week I want to revisit a hugely popular investment trust I've mentioned many times on these pages over the past few years. Alliance Trust (LSE: ATST) has made some big changes recently that could result in it becoming a core holding for investors in the not-too-distant future.

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Alliance has begun an interesting evolution away from its traditional in-house investment-management function to a fund-of-funds structure, with money looked after by eight highly regarded, very active fund managers. The fund picking is done by Willis Towers Watson, with many of the underlying managers not available to UK retail investors.

Each manager runs a bespoke portfolio of 20 holdings reflecting their highest-conviction ideas, and there is also an emerging-markets portfolio of around 50 investments. The trust is now looking far more like its peer Witan Investment Trust a high-conviction fund that invests in managers who take concentrated bets on quality businesses worldwide.

Stock selection shines

Since the adoption of the new fund-of-funds strategy last April, the net asset value (the value of the underlying portfolio) total return is 11.8%, versus 8.2% for the MSCI AC World benchmark index. Stock selection has been the key driver of this outperformance, says broker Cannacord. The trust's top holdings include recognisable names such as Amazon, Visa and Ryanair.

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On a quarter-by-quarter basis, the portfolio outperformed in Q2 and Q3, but lagged behind the benchmark in Q4, with a return of 3.8% versus 4.9% for the benchmark at a time when a small group of technology stocks drove the market gains. In the first two months of 2018, the trust's stocks returned 0.3%, marginally ahead of the index return of 0.6%, according to broker Numis. After 50 years of consecutive dividend growth, the fund also announced a final dividend of 3.29p, taking total dividends to 13.16p, an increase of 3%. This amounts to a yield of 1.8%. Cost control has also moved the overall total cost of ownership to 0.65%. Finally, the discount is currently around 6.5%, which is a bit more than I think it deserves Witan's by comparison is at 2.6%, so there may be another percent to come off that number for Alliance Trust.

Positives and negatives

A few small jarring bits of news. Firstly, losses increased at the fund's stockbroking platform business ATS, following its takeover of execution-only stockbroker Stocktrade. The other discordant note is that Alliance Trust doesn't break down returns from its underlying fund managers, which is a shame, though the fund has said that only one manager was behind the benchmark over the past year. I'd like to know which one.

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And a final side note: if we drill down into the top stocks in the various portfolios, that list currently comprises some uninspiring outfits. These include media giants Comcast and Charter, as well as tech giants Alphabet (Google) and Microsoft between them they probably make up around 7% of total equity holdings.

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Overall, though, the message is positive. Alliance Trust is in much better shape than before, with a clear mandate, and most analysts' comments have been very positive. Alan Brierley at Canaccord reckons the fund is now a buy, with the new strategy off to a "highly encouraging start, and if this can be sustained, [it] would look for superior NAV returns to be compounded by a further re-rating". Numis is also (cautiously) positive, "although it remains too early to meaningfully assess performance". I'd agree we probably need to see another year or two of numbers before Alliance Trust returns to a core list of holdings.

Activist watch

Activist fund Crystal Amber has begun to build up a stake in De La Rue, the company at the centre of a row over the production of Britain's post-Brexit passports, reports Sky News. Crystal Amber has bought roughly 2% of De La Rue's shares, and intends to continue building its stake over the coming months. The company, which prints banknotes for the Bank of England and other central banks, is appealing against a decision by the government to award the contract for designing and producing the next UK passport to a Franco-Dutch company. De La Rue's shares have fallen by almost 20% over the past year, with recent guidance that full-year results may disappoint coming alongside the departure of chief financial officer Jitesh Sodha.

Short positions BlackRock shuns guns

BlackRock, the world's largest asset manager, plans to launch two exchange-traded funds that will exclude civilian firearm makers and large firearms sellers, say Sabrina Willmer and Polly Mosdenz on Bloomberg. The asset manager had previously said it would explore ideas for funds of this type in the wake of February's high-school shooting in Florida.

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The iShares MSCI USA Small-Cap ESG Optimised ETF, due to start trading on 12 April, will track an index mostly made up of small-cap US companies. BlackRock has also filed a registration for the iShares ESG US Aggregate Bond ETF. Both funds will exclude producers and sellers of civilian firearms. Strong investor interest in the products could weaken demand for shares of gunmakers such as American Outdoor Brands and Sturm Ruger, where BlackRock funds have large stakes, notes Reuters, but it could take some time for clients to move enough money to make an impact.

Following on from US sanctions on Russia, shares in JPMorgan Russian Securities are down 14% since Friday, while BlackRock Emerging Europe, which has 56% of its portfolio in Russian stocks, has lost 10%.

Fund managers will soon be required to move investors into cheaper version of their funds, under new rules proposed by the Financial Conduct Authority, says Kate Beioley in the Financial Times. The new rules, which will be rolled out over the next 12 to 18 months, are designed to tackle poor consumer practices in the asset-management industry.

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