Alliance Trust | 2019 Performance Review

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  • 12 mins 44 secs
What were the key drivers of performance? Which managers had the strongest (and weakest) performance? Craig Baker, Global Chief Investment Officer, Willis Towers Watson talks about 2019's performance and what it means going forward.


Alliance Trust
Alliance Trust PLC

Alliance Trust PLC
River Court
5 West Victoria Dock Road

Phone: 01382 938320

PRESENTER: Craig Baker chairs the investment committee that runs the Allianz Trust Portfolio and he joins me now to review performance in 2019. Well, Craig, the markets were really driven last year by a small number of stocks, was that a headwind to performance?

CRAIG BAKER: Well, you’re right. You would expect that to be a headwind for an approach where the managers are told to pick a maximum of 20 stocks and think about long-term fundamentals of the companies they’re investing in. But actually we manage to outperform quite significantly over 2019 because of very strong stock selection from each of the managers. That was 24.3% return for 2019, the total shareholder return perspective, versus a benchmark return of 21.7%, so 2.6% outperformance over the year.

PRESENTER: So what were the main drivers of performance?

CRAIG BAKER: Yes, as we promised at outset, it’s really been stock selection that’s driven everything over 2019. Industry sector selection was ever so slightly positive, country selection was ever so slightly negative, but risk controlled on both of those, and stock selection was almost the entirety of the outperformance at the equity portfolio level.

PRESENTER: And was there any particular tilt towards value or growth investing, because it’s growth that’s done really well in the last few years?

CRAIG BAKER: Yes. So we run the portfolio on purpose to be fairly style neutral. So really there hasn’t much been coming from style effects. Clearly the value managers in the portfolio have struggled more than the growth managers as you say that have done well over 2019 and indeed 2018 before that, but it didn’t really affect our overall returns for the portfolio, hence the ability to outperform.

PRESENTER: What stocks did particularly well in 2019?

CRAIG BAKER: Yes, probably easiest to pick the two stocks that were the biggest impact on relative performance. So the first is Qorvo, which is a US semiconductor company that designs radio frequency systems that drive wireless and broadband communication systems. That was up over 80% over 2019. So that was probably the strongest performer given the weighting that it was in the portfolio. And then another one is New Oriental, which is a Chinese private education firm, and that was up in excess of 100% over 2019. That’s an interesting one, lots of things causing that to do very well over 2019, but the manager’s actually subsequently reduced the weighting in the portfolio, partly to take profits, but partly because of some fears around the Coronavirus impact on Chinese demand for some of the education services.

PRESENTER: And what was your worst performer, what did you learn from that?

CRAIG BAKER: Well, interestingly, the stock that had the biggest negative impact was a stock we didn’t hold in relative terms, and that was having no holding in Apple, which was one of the best performing of the large cap stocks over the year. And indeed that’s been a theme over 2018 and 2019 that a small number of very large technology companies in particular have done extremely well and led the market, and generally we’ve been slightly underweight some of those, which has been a bit of a headwind, hurt us slightly in 2018, despite that we outperformed in 2019.

PRESENTER: Which of your underlying fund managers did best?

CRAIG BAKER: Well generally the more growth oriented and quality oriented managers did better, and so all of those really outperformed over the last two years. There was actually a bit of a shift in that in the fourth quarter of 2019 where some of the value managers did a bit better than they had done in the first nine months of the year, but really the more value oriented managers like your Lyricals, your River and Mercantiles and the like, they would have struggled more in the recent environment. And the more growth oriented managers like GQG and SGA and some of the others, Vulcan, one of the newer picks is an interesting one because it is a value manager but tends to focus on high quality businesses that they would hold for the long term, some of those more growth oriented managers had a better time of it.

PRESENTER: You mentioned Vulcan, how do they complement the other managers you’ve got; in retrospect did you add them into the portfolio at a good time?

CRAIG BAKER: Yes, well as it happens with the benefit of hindsight it’s been a very good time to add Vulcan to the portfolio. But the reason for adding them was this was a manager we’d known for a long time, thought they were high quality, wanted to get them in the portfolio. There was an opportunity that they suddenly had some capacity that we could put some assets with them, so we took that opportunity, and were able to rebalance the portfolio slightly, and they really bring a different way of looking at portfolios. They run much more concentrated portfolios; they’re actually nearer the 10 stock than the 20 stock position. They tend to be in companies that they would be comfortable owning if the stock market shut for the next five, 10 years, and they think are going to be high quality winners that just happen to be at a low valuation as of today.

PRESENTER: You employ managers from around the world; do those in the US tend to have a slightly different view from those in the UK?

CRAIG BAKER: I think with the managers we’ve got in this portfolio they all very much think in global terms. The manager that is more US focused really in the portfolio is Lyrical, but the majority of them are very global. Interestingly, when you look at Vulcan, they actually have got a significant bias to the US as of today. That’s where they’re finding the most attractive companies from a bottom-up perspective. But that won’t always be the case. Certainly some of the more European-based managers have been more positive on the UK and Europe versus the US, which has been slightly detrimental over the last couple of years for those specific managers. But for the trust as a whole we haven’t had a big country position so as I said before performance has really been driven by the stock selection.

PRESENTER: ESG is a topic that’s becoming more important to fund managers and investors alike these days, how have you been developing your process?

CRAIG BAKER: Yes. So ESG has always been a big part of how we manage this portfolio, in the sense that we always do a separate assessment of each manager that we like on pure ESG grounds. How much do they incorporate those factors into the way they look at companies, certainly, and also how they do stewardship and their voting policy, so that’s always been the case, and there’s a minimum you would expect for them to even make their way into the portfolio. And we do monitor what the overall portfolio looks like on a number of metrics, in particular around carbon intensity and carbon emissions with concerns around the risk that you can be running from a climate change perspective and the inevitable policy response that’s coming from that that could impact a number of the companies.

And I think probably the biggest change that was made to the trust over the year was bringing in Hermes at Federated Investors, who are one of the largest engagement overlay specialists in the world. And what they do is on our behalf they engage with the companies that are held in the Alliance Trust Portfolio, and try to make them best in class on the E, S and G factors. And they also make proposals to each of the underlying mangers as to how to vote on any of the resolutions that are coming up at those companies. Now the underlying managers don’t have to follow the advice of Hermes, but if they don’t they have to tell us why, and that’s the kind of thing we’re challenging them on, on an ongoing basis.

PRESENTER: What would you say are the really big investment risks when it comes to something like climate change?

CRAIG BAKER: Well I think it is one of the biggest risks that managers have to be thinking about now. It’s not the only risk. There are multiple other risks they also need to be thinking about. But when we put in context the possibility that a carbon tax comes in in countries where it doesn’t exist, or the price of carbon goes up significantly in the areas that does have an effective carbon tax, then that could have quite significant implications for some of the obvious emitters of carbon, the scope one emissions. But actually it’s a lot more complex than that, and really understanding the carbon intensity of a company taking into account its full supply chain, that really means that the manager has to have it embedded into the way they look at companies, and so we think that’s pretty important, that’s something we spend time challenging the managers on on a regular basis.

PRESENTER: Another big risk that’s out there at the moment is coronavirus, how do you think about that, particularly given when you can’t have absolute certainty on what’s going to happen and when?

CRAIG BAKER: Yes. So I mean there’s a good example of something where we’re not able to call what’s going to happen on coronavirus, even medical experts aren’t able to call that. And so that’s just a good example of one of the advantages of a trust like this that (a) has got a lot of diversity by the number of companies it’s investing in, albeit that it’s allowing each manager to really show high conviction. Secondly it’s global. So it’s not going to be one single country that gets the brunt of the coronavirus that then affects the whole of the Alliance Trust Portfolio. But thirdly we’re challenging the managers on how they’re thinking about these things as it relates to the specific companies that they’re investing in. So is it having an impact on their supply chain, is it having an impact on the number of orders that they’re seeing from China. For example, and that’s the kind of discussions that we’re having with the managers and trying to put that in context as to what they’re doing in the portfolio on a day-to-day basis. It’s just through those kind of discussions that you build up more and more confidence in the manager’s ability to weather the various storms that could come at them.

PRESENTER: So what’s your outlook for 2020, and is the risk of a global recession now on the rise?

CRAIG BAKER: Yes. So we’ve actually been relatively cautious about equities for a year or so in the concern that we could have a recession. Actually some of the moves that have happened on the monetary policy side actually make that a bit less likely until something like a coronavirus comes along. And the reality with market falls is that it’s usually something you haven’t thought of that causes it, otherwise it would have been priced into the market, and so you’re looking at overall valuations. And whilst we’re not saying that equity markets looked very overvalued, clearly they’ve had an extremely strong run for the last few years, and so we’re going at it with an element of caution. One of the things that’s been interesting in recent times as we alluded to earlier is that the market globally has been unusually driven by a small number of very large companies. And I think if we see any kind of reversal of that, that’s an extremely good market environment for our portfolio in relative terms, relative to its benchmark. So we’re actually very excited about the potential for outperformance over the course of the next year or two.

PRESENTER: And are you confident you can continue to increase the dividend?

CRAIG BAKER: Yes absolutely, so we’ve got plenty of revenue reserves. So even if the income yield on the portfolio for a short period of time fell below the dividend yield we were wanting to pay, there’s absolutely no issue at all of us continuing the growing dividend; indeed it’s now been 53 years in a row of growing dividends and that’s not going to stop any time soon.

PRESENTER: Craig Baker, thank you.

CRAIG BAKER: Thank you.