Speaker 0:
Hi, I'm Gemma Jackson from Interactive Investor and delighted to be joined by Craig Baker from Alliance Trust. Craig, Um, Alliance Trust has been really creeping up Our best buys the top 10 best buys this year to date. Why do you think private investors are flocking back to the trust?

Speaker 1:
Well, I think there's probably three reasons for that. The first is, um, quite simply we've had some very strong performance. We've outperformed, uh, our benchmark by close to 2% per annum over the last three years. And that's, uh, actually led to our performance of the peer group by, uh, the wider peer group 4% per annum and the the investment trust peer group by 5% per annum over that period.

Speaker 1:
But the second point is that that performance has come through steady out performance in different, uh, market environments. And so I think a lot of people have, uh, been invested in some growth trusts that have done very, very well for a number of years and then really struggled in 2022 when you had a reversal. Um, we've actually continued to to perform because of the style neutrality of the portfolio

Speaker 1:
And then I think the final reason is that, um we've had considerable growth in dividends, uh, on the, uh, portfolio. So it's got a good dividend yield at 2.5% but of of the A IC dividend heroes that are out there, we've had the strongest growth in dividends over the last five years. Of any of them.

Speaker 0:
30%

Speaker 0:
last year, I think, wasn't it? I mean, the performance has been excellent. Um, but you haven't, and you've certainly beaten the a IC are average over the last three years. But you haven't beaten a very, very tough target that you set yourselves over that rogue in three year period. Can you tell us a little bit about that? And,

Speaker 0:
um, being slightly cheeky have have Are you a hostage to fortune on that super tough target?

Speaker 1:
It's a good question. So we we we've said that over the very long term, we think we can achieve out performance of the MS. C I or country world index of around 2% per annum. That's our stretch objective. We think it's achievable in the long term. It's actually what we've been able to do in similar portfolios over the very long term in the institutional space.

Speaker 1:
Um, but importantly, we've said, Um, although we're looking for doing that on rolling three year periods, there are going to be some three year periods where that's incredibly difficult to do.

Speaker 1:
And there's gonna be some rolling three year periods where that's actually very easy to do. It's gonna be tough, uh, on average, but there's going to be periods where it's easier or harder, and we've had a period over the last, well, five or six years where it's been a really tough, um, thing to outperform the MS C I or Country World Index. It's been one of the best performing,

Speaker 1:
uh, portfolios out there because the market's been led by a small number of very large companies, Uh, that are disproportionately a large proportion of that index.

Speaker 1:
So everyone's struggled, and hence why you can see that we've outperformed the peer group by four or 5% per annum. Uh, but only out form the benchmark by just shy of the 2% per annum that we're talking about over the last three years. But no, we're confident that in the long term we can achieve that kind of level of outperform of both the peer group and the index.

Speaker 0:
So and it's been a very eventful several years that you've been managing this trust for and

Speaker 0:
how many of the original lineup are still are still there?

Speaker 1:
Yes. So we started with eight managers, nine portfolios, Uh, because one of the managers runs, uh, a global equity portfolio, but also in a specialist emerging market portfolio. Of those eight managers, six are still in place, so two of those are are have gone, but, um, as I say, uh, six managers and seven portfolios are the same as the, uh were in place when we started on first of April, 2017.

Speaker 0:
Um,

Speaker 0:
typically, how long would you give a manager before you started to think about potentially cutting your losses? You're obviously very patient. Um, but what what would be the crunch point? And is there a sort of length of time on average that you might

Speaker 0:
consider before you start to make changes?

Speaker 1:
Yeah, it's it's the classic question, uh, in investment, isn't it as to how long you you give it when things aren't going as well as you would have expected. I think the reality for you, for us, is that we're never going to change a manager purely on short to medium term, uh, performance outcomes. In fact, on average, we'll be giving more capital to those that have had a tough time recently,

Speaker 1:
all other things being equal. And we'll be, um, taking profits from those managers that have done particularly well, uh, recently because their style is gonna come in and out of favour over time. And and so that's the natural approach that we take, Um, when a manager is significantly underperforming, the thing that we're doing is trying to understand where that underperformance has come from. So how much of it has been because of their style, and you would expect that

Speaker 1:
and how much of it has come from them just making mistakes. So we spent a lot of time trying to understand what did they think was going to happen to the earnings in the companies that they're invested in? Has that actually turned out to be the case? And it's just that the market hasn't necessarily appreciated that in the share price at that particular point in time. Or did they actually call the fundamentals of the companies wrong. And so that's the analysis we're doing. If we're confident that actually, they've been getting

Speaker 1:
their calls right, and actually, in a number of instances with the managers whose performance has been less good in our lineup, they've actually, um, had their companies producing better than expected earnings. It just hasn't been reflected in the share price yet. Then we're very confident in keeping those managers and actually giving them more capital where it's a situation where they've actually got most of those fundamental calls wrong. That's when we would change a manager,

Speaker 1:
Um, but often the reason for changing a manager is something else. It might be, um, that something has changed in the underlying proposition that we bought into. So it could be a change in the individual running the portfolio. It could be a change in the ownership of the company.

Speaker 1:
Uh, it could be that they seem to be changing the the nature of the portfolio. So it's a different style to what we might have expected. Or maybe that it's ended up being too similar to one of the other managers in the lineup, and it gives us an opportunity to put someone else in. Or it could be as simple as we've just found an even better idea, uh, that we want to add to the portfolio. So those are the sorts of things that generally lead to changes in managers.

Speaker 0:
Yeah, it's interesting going going back to the thinking about the investment trust industry

Speaker 0:
as a whole. Um, we obviously saw a very small handful of some of Britain's biggest, oldest investment trusts and and best love really go multi manager. But it's never grown. If you look at the open ended sector, there's so many multi manager funds. And then if you look at the trust, there's a few. And but from a cost perspective, very, very competitive. So

Speaker 0:
why do you think there aren't more investment trusts with this? This multi manager approach, which is working so well for for for you guys and number two, I suppose, Why should people choose Alliance trust over some of the other multi manager options that are out there?

Speaker 1:
Yeah, it's a good question as to why there aren't more, uh, multi manager approaches. I think I'd probably say it's because it it's actually pretty difficult to do, You need a a very large research team to cover all of the various asset managers that are out there. So, as an example at Willis, to Watson who, uh, who manage, uh, Alliance Trust. We've got a research team of 65 people that just go out and research investment managers every day in every location around the world. Um,

Speaker 1:
there are not many organisations that have got that size of, um, research depth on top of a portfolio management team. And again, we've got a, uh, a portfolio management team. That's, um, that's of a similar size as well. So that's that's one part of it. Uh, I I think, um And then the second is that, uh, to your question of why do we think, um, we're well placed relative to the others that are out there.

Speaker 1:
I think one of the issues about uh, the multi manager approach, uh, is that it could lead to, um portfolios being overly diversified and look quite similar to the benchmark and hence quite difficult to out perform by a significant amount over the over the long term, and that the other point is that it can become quite expensive because you've got a double layer of of fees.

Speaker 1:
I think the reason we've been able to get around those is because we've done things a bit differently. So the first, um, element of it is that we ask each of the managers just to run a best ideas portfolio, so they're running a maximum of 20 stocks. So, uh, we worry about risk management in terms of how we blend the managers, rather than asking the managers themselves to think about risk relative to the benchmark, they should think about risk more in terms of permanent loss of capital.

Speaker 1:
Uh, and so because we've got those concentrated portfolios when you blend them, you've still got a portfolio that can look very different to the benchmark. And we've got a, uh, an active money in the portfolio of 80% which is very high for a for a multi manager approach. So that's that's the first point.

Speaker 1:
And then the second point is, um, we've been able to, um, get the fees down quite considerably because of our scale in the institutional space that we're actually able to get, uh, managers to offer, um, uh, their products at a much lower fee than you would be able to get otherwise. And so that's maybe another reason why it's tough for others to do. The multi manager approach is that getting both of those things is quite tough,

Speaker 1:
unless you've got a lot of assets alongside it, which we have on the institutional space. Sure,

Speaker 0:
and and And I suppose you can correct me. But the the sort of blend of value and and growth stocks will will help you deviate from that benchmark, too, I would have thought, But how do you manage that blend? I mean, I imagine it's because you know it. It allows you to sort of

Speaker 0:
potentially outperforming all different market conditions. Is that the idea? But how do you manage that? Is it 50 50? Do you have flexibility? How does it work?

Speaker 1:
Yeah, so the the The principle, as you say, is that we want a portfolio where stock selection is going to really drive everything.

Speaker 1:
Uh, and there's two reasons for that. The first is that generally, um, we find that over the long term stock selection tends to be a more efficient way of, um outperforming rather than, uh, asset allocation. Um, you know,

Speaker 1:
thinking about, uh, sector biases, styles and and the like, uh, those cause a lot of volatility for the amount of out performance you can get where a stock selection doesn't have to cause that much volatility for the amount of out performance you can get. So it's just a more efficient,

Speaker 1:
uh, way of, uh of of doing it. So that's the the the first piece. And then the second piece is that it allows you to, uh, to do OK, almost regardless of, uh, what's going on in in, um, the economy and markets, which is attractive in particular, uh, for a a retail audience. So those are the the reasons that we we structure it that way.

Speaker 1:
What we then do is just say, Well, let's find who we think are the best stock pickers in the world, no matter where they're located, no matter what their style is. And then let's think about what a combination of those best stock pickers fits quite well together, such that stock selection drives everything.

Speaker 1:
So it's not a matter of we want to fill a a box here. That's large cap value and a box here. That's small cap growth and and so on and so forth. Instead, it's let's just find a lot of great stock pickers that all think about the world differently. They're all gonna come with different

Speaker 1:
styles. Will, um, blend them with weights that then get us to when we do all the analytics on the portfolio, showing that there isn't an overall style bias in the portfolio so that that's the principle by it. You essentially end up with the best growth stocks, the best value stocks, the best momentum stocks across the cap spectrum.

Speaker 0:
So so the discount has been pretty stable in an environment where, on average, we've we've been seeing investment. Trust discounts widen.

Speaker 0:
Have you been buying back Or, UM, have you been benefiting from the popularity of the trust?

Speaker 1:
So it's a bit of both. I think ours has been more stable than a number, partly because of the popularity of the trust, which is really a lock down to this idea that it's, um uh, it's style neutral and hence doesn't have quite as many swings in the, uh, the discount because of extreme out performance or underperformance driven by a style

Speaker 1:
Um, And partly there are, um, some buy backs that happen that the board have consistently ensured that that discount stays at a, uh at a at an appropriate level. And it hasn't really changed much, as you say in the whole six years that we've been managing the

Speaker 0:
trust it it's really interesting, because what what we tend to find with our customers anyway is during uncertain times. Fund investors tend to go passive at a time when

Speaker 0:
probably a lot of professionals would argue is the time to go active. And, um, investment trust investors tend to flock back to those golden Aldi kind of large, global generous that have been that have been serving shareholders for for decades. But just as a point of principle, do you

Speaker 0:
Do you think that the active management industry generally needs to do some better storytelling to sell active management more? I always say investment trusts are the ultimate active vehicle, Um, but you're still competing with passives. Aren't you in in in open ended land as well as you know your sector peers? Are we doing a good enough job to sell the story? Do you think

Speaker 1:
it's a good question. I I I think now is is a perfect time to be making the arguments for active management when you've had a period,

Speaker 1:
um, of the the the passives, doing about as well as, um they've ever done relative to the full peer group. Um, because markets have been driven by a small number of very large companies. And of course, the passive index has typically got more in those very, very large companies. Uh, than, um, the typical active, uh, approach has. So yes, I think now is a really good time for people to be stepping up and talking about that story.

Speaker 1:
Um, that brings in, um, other things as well to the story of active management such as, um, sustainability and really thinking about those issues. Uh, which is easier to do in an active portfolio than it is in a passive portfolio. When all you can do is stewardship through voting and the like.

Speaker 0:
So you you're buggy, Then, are you, you buggy? On equities medium medium term.

Speaker 1:
So we're very bullish on the portfolio as it stands. Um, we talk to, um both, um, the more value oriented managers and the more growth oriented managers about some of the ideas in the portfolio.

Speaker 1:
And there are so many examples in both those spectrums where, uh, the companies they're investing in have, um, surpassed all expectations on earnings growth, Profitability of the companies. The fundamentals of the businesses have really grown significantly, but actually, the share price hasn't and in some cases has fallen even though they've been, um, outperforming the market as a whole. So we sit there incredibly excited about the potential for some of those companies,

Speaker 1:
uh, to to, um realise value from that. But at the same time, we're always looking at, um, some of the risks that are out there at a macro level for equities as a whole. And it's fair to say that, you know, if you look at the way bond markets are priced, they're essentially saying there's gonna be a recession.

Speaker 1:
Equity markets are kind of saying there's not going to be much of a recession, and so we've got a little bit of caution there. So whilst we're very positive about the Alpha potential from the portfolio, the out performance expectation, um, a and and potentially what that means for the absolute returns. Um, we're at the lower end of our normal gearing range. In terms of the amount of leverage in the portfolio, we are levered, but, uh, lower than we typically would be.

Speaker 0:
Ok, that's interesting. Thank you.

Speaker 0:
Um, so I was reading the Investec skin of a Game reports this week, which is fascinating, um, and which shines the spotlight on the sector that fund investors could perhaps only only dream of. Really? Um, the whole issue of skin of a game is obviously, um, we know our customers are really interested in in the whole issue. Um,

Speaker 0:
some would say that you know, if a manager eats his or her own cooking it, it can create an alignment of interest. But others might say it could encourage excessive or risk taking or or too little risk taken. So I'm gonna ask you, do you do you have skin in the game? And where do you sit in this whole debate, which can be uncomfortable for some managers?

Speaker 1:
Well, it's an important question for us when we're looking at the managers that we're investing with as well. So, uh, you know, it's from both angles, both in terms of the underlying stock pickers that are in the Alliance Trust portfolio. How do we look at those in terms of skin in the game? And as you say ourselves, uh, on on that front within, uh, Alliance Trust. So maybe if I take both of those parts. So

Speaker 1:
our general view is that we do ask those questions of the managers that we invest with, um, I neither think it's the most important thing out there, nor irrelevant. I think there's some advantage to seeing people, um, that have got some skin in the game are coveted alongside clients. But equally, um, some of the points you make I think are valid. I I I think if an investor has a huge amount of coin investments, that raises a few questions. Firstly,

Speaker 1:
they've been charging too many fees to get that amount of money to put in the funds in the first place. And secondly, uh, are they going to take too little risk if they've got a lot of their own money in it and they're quite close to retirement, or are they gonna take too much risk if they're a long way from retire? What you really want is that there's a consistency in the time horizon of the investor to the time horizon of the, um of the portfolio managers.

Speaker 1:
So that's an important piece. So it it's important to put it in context as to, uh, that coin investments. But on average, I think it's a good thing to see people invested alongside their clients. And so, to answer your second question, yes, I am invested, uh, in Alliance Trust, as are the other members of the investment committee, uh, at W T. W that manages, uh, Alliance Trust. And it's a significant part of, uh, of our liquid assets. Good to

Speaker 0:
know,

Speaker 0:
Craig. Thanks very much.

Speaker 1:
No problem. Nice to speak to.