The hugely popular Alliance Trust has accumulated assets under management (AUM) exceeding £2.7bn as the fund in part thanks to its stellar performance over the past decade.
It has stormed 75.3 percentage points ahead of its peers in the IT Global sector over 10 years with a total return of 236.3%, placing it firmly in the top quartile of the sector.
Even over the past 12 months, as many funds have plummeted, Alliance Trust maintained a 14.4 percentage point lead on others in the sector, down 3.9% compared to the peer group’s 18% decline.
Despite this comparatively good performance, the trust is currently trading at a 5.1% discount as global funds overall have taken a downward turn.
Here, lead manager Craig Baker, tells Trustnet he stops the portfolio’s multi-manager approach from dampening performance and why he sees unrecognised talent in the UK market.
Total return of trust over the past decade
Source: FE Analytics
Does the trust’s shared management between nine groups risk limiting its performance?
The problem with most multi-manager approaches is that they either become so risk managed that their likelihood of beating the benchmark is small as they have too many stocks, or they become quite expensive because they’ve got double the fees.
A big advantage of the multi-manager approach, though, is that you're not reliant on the skills of one asset management firm or one manager.
You’re not completely biased towards one style, and we’ve seen a lot of that in the past couple of years with some of the best performing trusts being growth trusts. Some of those are now down 50% or more as the markets turned.
You get this extreme performance from them, but the whole idea behind Alliance Trust is to be that steady, long-term performer that you can hold and feel comfortable it’s going to do well in most environments.
How do you avoid the trust becoming too risk managed?
We actually ask each of the managers to run separate accounts for us of their best 10 to 20 stock ideas.
We tell them to think about risk in terms of permanent loss of capital rather than risk relative to some arbitrary index or benchmark, and we'll worry about the risk relative to the benchmark by how we blend these stock pickers.
In portfolios that have eight to 10 managers, you might end up with 400-500 stocks and you’d end up looking very close to the benchmark index, making it difficult to outperform.
We end up with a portfolio with less than 200 stocks and that's much more concentrated than you would get in others.
Also, because of our size we're also able to get the costs down quite considerably. We're looking at 60 basis points, which is actually lower than a lot of single manager approaches, let alone many multi-manager approaches that that are out there.
What have been your best performing stocks?
We understandably get asked that question a lot, but we're not far off having a relatively equal weighting to about 180 companies so no single stock makes a significant proportion of our outperformance or underperformance.
Nvidia did incredibly well for us – we held it for a long period of time and was up 60% over the period, but it doesn't look that interesting when you look at the analysis on contributions to returns because we've purposely designed it so that no one stock or two stocks ever really drives returns.
What were your biggest detractors to performance?
The fact that we've had nothing in Apple and Tesla until recently has been quite painful. That's actually cost us about 1% per annum on performance. It’s quite extraordinary how much they've led the market.
Even though you’ve performed well compared to your peer group this year, have you felt a hit from the tech selloff?
Yes, we’ve been slightly underweight in FAANGS so that’s been beneficial in relative terms but in absolute terms, stocks like Alphabet are down.
What’s interesting is that the biggest headwind we've had since inception is we're always a little bit underweight in large cap and overweight to mid and small cap.
There’s been this most extraordinary five years where large cap and even within that mega cap has roared. We’re excited about the portfolio today because there’s a lot of room for that to reverse and that would be a real tailwind for the strategy.
Total return of trust vs sector over the past year
Source: FE Analytics
Your UK exposure is 8.2 percentage points higher than the benchmark – do you maintain your conviction in the region despite the mass sell offs?
A few of the managers find the UK attractive because it has underperformed the US for quite a number of years.
You can find some really high-quality multinationals listed in the UK with great management teams but their share prices just haven’t moved for about five years, partly because of the Brexit sell off and partly just because the US has run up massively.
Alliance Trust’s regional allocations
Source: Alliance Trust
Could the UK then become more popular as investors seek out value opportunities?
We've got some really interesting companies in the UK that have been growing their market share and have been producing good earnings, but it just hasn't yet been reflected in share prices. As the market starts to focus a bit more on fundamentals that should come through.
You're seeing a lot of growth names get hit at the moment just because their growth names, some of which are quite rightly getting hit because they went too far in their valuations but others are getting hit a bit unfairly.
Some of the value managers are sitting with companies, particularly in the mid-cap space rather than the large-cap space, that still have been generating great outcomes.