Alliance Trust: is this global fund worth investing in?
Alliance Trust was the best performer in its sector in 2023 and remains a promising pick.
Rarely can the aphorism “pessimists sound smart, optimists make money” have been truer than in 2023. The Eeyores came into the year insisting that rising interest rates would cause a recession in the developed world, corporate profits would be hit, stockmarkets would slump and the only safe haven would be in government bonds. Yet recession was averted, earnings dipped but returned to growth, equities, especially in the US, performed well and government bond yields continued to rise (reflecting falling prices).
The pessimists argue that most of the market’s gain was attributable to the “Magnificent Seven” stocks at the top of the US market (eight if you include Netflix), which make up 28% of the S&P 500 and jointly rose by 80%. This is, they believe, an unsustainable bubble that will pop when the recession, at last, materialises in 2024. Cue market mayhem and happy pessimists. Pessimists spend too much time telling investors why they are all wrong and not enough listening to what the market is telling them. Markets do occasionally charge off in the wrong direction, but not nearly as often as “expert” forecasters.
An improved outlook for inflation
That is the spirit in which to judge this year’s major surprise: the rally in government bond yields that has taken yields in the UK and the US for ten-year issues below 4%. Given the mountain of issuance that lies ahead and no evidence of the increased demand necessary to absorb it, it had seemed likely that real yields would have to remain high to attract buyers.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The explanation is not that the market is “wrong”, but that the outlook for inflation is better than believed. It looks poised to drop back to 2%. There is plenty of evidence for that in the US and European inflation data already. Central banks are thus likely to cut interest rates, but short-term rates are not a driver of equities; yields on public debt, which have little scope to fall further, and corporate earnings, whose growth is accelerating, are much more important.
Deposit accounts and bonds may look more attractive than they have for many years, but the best returns are likely to be earned in the stockmarket. It is tempting to invest in the many cheap areas: investment trusts on juicy discounts, private equity, infrastructure, small and mid-caps, the UK, and Japan. But start with a mainstream global trust. The Baillie Gifford trusts, such as Scottish Mortgage and Monks, are rallying but have been left behind in the renewed popularity of growth investing.
The surprise winner in 2023 was the 135-year-old giant Alliance Trust (LSE: ATST), with £3.5bn of assets. This has returned 20% in the last year, well ahead of its rivals and the MSCI All Countries World index’s 14.5% in sterling terms. Over three and five years, it has performed broadly in line with the index.
The shares trade on a 5% discount to net asset value (NAV) and yield 2.3%, the dividend having been increased for 56 consecutive years. The trust used to be self-managed out of Dundee and was something of a lame duck, but in 2017 management was taken over by Willis Towers Watson (WTW) using a “multi-manager” approach. This means that the portfolio is parcelled out to ten carefully chosen managers, though one manager, GQG Partners, runs an emerging-markets portfolio as well as a global one.
Each of the 11 strategies invests between 4% and 20% of the portfolio in up to 20 “best ideas”. Adjustments are made to the allocations twice a year, but the focus is on stock selection, not regional allocation or macroeconomic investing. The styles cover the spectrum from growth to value. WTW invests with managers who have good records in their speciality even if doing so is out of favour for a time.
The multi-manager approach does not have a great record, having worked much less well at Witan, with £1.5bn of assets (+8% over one year, +34% over five), and at F&C Investment Trust, with £5.5bn of assets (+11% over one year, but a respectable +58% over five). Around half of F&C’s assets are managed internally, but by different teams, and F&C has a rather unwieldy 457 holdings against just 205 for Alliance.
Alliance’s lead manager Craig Baker notes that this year’s performance has not been driven by the Magnificent Seven (or eight), to which Alliance has had an overall lower exposure than the global index. He points out that the winners in each decade do not stay at the top forever; the 1980s were dominated by global oil majors, the 1990s by Japanese financials and the 2000s by telecoms and the internet. “The leaders from each area had a smaller market weight a decade later.”
Alliance’s winners have mostly come from elsewhere, including Latin American giants Petrobras and Mercadolibre. A new allocation in the middle of the year to Japanese value and an older one to emerging markets are regionally specific, but otherwise, managers are either global or focused on the US (63% of the index). These are not normally managers or strategies available to private investors. Alliance seems unlikely to maintain this year’s rate of outperformance, but neither should it fall much behind global indices. That makes it an excellent one-stop-shop for global investment or a core constituent of a broader portfolio for cautious investors wary of bargain-hunting.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Related articles
- What you need to know about investing in funds
- Most popular funds and stocks purchased in 2023
- Fundsmith Equity fund underperforms again - is it still a winner?
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
-
Cash hoarders take total UK savings to £2 trillion – why aren’t we investing?
Investment-shy Brits are hoarding huge amounts of cash in their savings accounts. We look at the case for saving versus investing.
By Katie Williams Published
-
The MoneyWeek Christmas Charity Appeal: who are we supporting and how to donate
This year MoneyWeek is supporting YoungMinds, tackling mental health for children and young people. Here’s why we are partnering with YoungMinds and how you can help.
By Kalpana Fitzpatrick Published
-
Is now the time to buy Marshalls?
Former market darling Marshalls, a landscaping and building products supplier, looks too cheap. Is it time to buy this once-admired stock?
By Jamie Ward Published
-
Top UK stocks with healthy cash flows and dividend yields
Three promising UK stocks according to Alan Dobbie, co-manager, Rathbone Income Fund
By Alan Dobbie Published
-
Warren Buffet invests in Domino’s – should you buy?
What makes Domino's a compelling investment for Warren Buffet's Berkshire Hathaway, and should you buy the UK-listed takeaway pizza chain?
By Dr Matthew Partridge Published
-
4Imprint makes a strong impression – should you buy?
4Imprint, a specialist in marketing promotional products, is the leader in a fragmented field
By Dr Mike Tubbs Published
-
Invest in Glencore: a cheap play on global growth
Glencore looks historically cheap, yet the group’s prospects remain encouraging
By Rupert Hargreaves Published
-
How to save the dying UK stock market
The UK stock market is in long-term decline. To fix that, we must first recognise why equity markets exist and who they should serve
By Bruce Packard Published
-
Should you invest in Trainline?
Ticket seller Trainline offers a useful service – and good prospects for investors
By Dr Matthew Partridge Published
-
Key takeaways from the MoneyWeek Summit 2024: Investing in a dangerous world
If you couldn’t get a ticket to MoneyWeek’s summit, here’s an overview of what you missed
By MoneyWeek Published