Global Equity Investment Trust

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  • 15 mins 28 secs
Craig Baker, Global Chief Investment Officer, Willis Towers Watson discusses what the investment strategy is for the fund, who it is aimed at & why they are backing global equities. Craig also pinpoints the value of Vulcan to their fund.


Alliance Trust PLC

Alliance Trust PLC
River Court
5 West Victoria Dock Road

Phone: 01382 938320

PRESENTER: Craig Baker is Global CIO at Willis Towers Watson, and he chairs the investment committee responsible for the Alliance Trust. He joins me now. Craig, can you give us a quick recap on the investment strategy behind the portfolio?

CRAIG BAKER: So Alliance Trust is now 100% global equity investment trust, and we run that on a multi-manager basis. But it’s got a bit of a difference to normal multi-manager approaches. So here we have nine managers, but importantly each of them are running a very concentrated focused portfolio specifically for Alliance Trust. So each of the managers are told to go anywhere globally but have a maximum of 20 stocks.

PRESENTER: And what sort of investor is it aimed at?

CRAIG BAKER: So this portfolio is perfect for anyone that’s got a long-term time horizon. Ultimately a hundred percent equity portfolio, over the long term we think that will produce very strong capital returns, but will also produce a rising dividend, as it has for over 50 consecutive years now.

PRESENTER: There’s a trust issue in the industry right now given what’s happening with the Neil Woodford saga. So why should savers trust you with their money?

CRAIG BAKER: So I think there’s a few reasons why you would trust the Alliance Trust going forward. The first is this is an investment trust that’s been around for well over a hundred years, and so has got that strong brand and an independent board looking after the trust, but also it’s run in a multi-manager process. So in other words you’re not reliant on the skills or the whims of any single investment management organisation or individual, and you don’t have the strong style bias that would be inherent in one manager’s approach, and also it’s a highly liquid trust and so there are no issues around offering more liquidity than the underlying stocks in the portfolio have.

PRESENTER: The trust has been shedding its non-core assets in the last couple of years, what are the advantages of that?

CRAIG BAKER: Yes, so it is now back to its roots, focused as a hundred percent global equity investment trust. The non-core assets have been a drag on performance for a few years now, and so as of around June 2019 almost all of those non-core assets are gone with the sale of ATS, the platform being the last of big non-core assets that were in the portfolio. So going forward we think this is now going to be a pure take on the multi-manager approach in the equities that has performed well since its inception, and certainly that approach has performed well for many years that we’ve been following that in the institutional space.

PRESENTER: You’ve recently added in a new manager, C.T. Fitzpatrick of Vulcan Value Partners, what does he bring to the team?

CRAIG BAKER: So Vulcan and C.T. are people that we’ve been following for a number of years now, and have been very positive on them for some time, but they’ve been closed to new business. But fortunately they’re willing to take on the Alliance Trust portfolio now, which is very exciting for us. They bring a slightly different approach. Whilst they would talk of themselves as a value manager, they’re really fishing in a different pond to some of the other value managers that we’ve got in the portfolio, focusing primarily on high quality companies. And because they’ve got a bit of a bias towards the US, currently a strong bias towards the US, it’s actually quite a natural fit with a number of the managers that are underweight the US in the portfolio, and allows us to ensure that we don’t have any big country biases in the portfolio. We want stock selection to drive everything, so it just gives us a bit more flexibility in that as well.

PRESENTER: So to be clear this is a global equity portfolio that just happens to have a US bias at the moment.

CRAIG BAKER: Correct. A global mandate, it can go anywhere, as it happens today almost all of his ideas are in the US.

PRESENTER: So which of your managers have you taken money from to give to Vulcan Value Partners?

CRAIG BAKER: So we naturally follow a rebalancing process. So managers that have done particularly well we tend to be top slicing at any point in time. The managers that have struggled more, assuming that we remain positive on their skill, we tend to be giving money back to. So it was partly some of that with some of the growth managers being top sliced, and partly we just took money from most of the other managers, just to fit in this ninth manager into the portfolio.

PRESENTER: In your most recent fact sheet you mentioned that the growth investment style has outperformed in the last 18 months, do you now think that value is going to outperform in the future?

CRAIG BAKER: So value’s had a terrible time for quite a number of years now. It’s interesting that actually October’s the first month in quite some time we’ve seen a bit of a reversal of that with value doing particularly well. But what we try and do within the Alliance Trust portfolio is not really let style biases drive returns. And so we tend to be relatively style neutral in this. There’s an element of rebalancing as I said, taking away from the managers that have done particularly well, which would be the growth managers, and giving a little bit to the value managers. But overall no strong style bias in the portfolio.

PRESENTER: You’ve also noted recently that large cap companies have beaten small caps. Again, do you think that’s going to reverse?

CRAIG BAKER: Yes, it’s been a really unusual period where a small number of very large companies have really driven markets; indeed the vast majority of companies have actually underperformed the index in the last couple of years, and it’s been a small narrow part of the market that’s done particularly well. Clearly that can’t go on forever. Whether it’s going to carry on for another short while yet, we don’t know, and again we try and make it such that that shouldn’t drive performance. But it’s fair to say it’s been a really tough time for active managers over the last two calendar years really, 2018 and 2019. And despite that we’ve continued to outperform since inception, but it has been a tough period. And so if we get any kind of reversal of a small number of momentum driven large cap companies driving markets, then that should be very positive for the strategy.

PRESENTER: And what’s the small cap exposure that you’ve got in Alliance Trust?

CRAIG BAKER: So the portfolio doesn’t have a particular bias to small cap per se. It’s got a bias away from the mega cap, and so more in the small end of large cap and the mid cap area relative to the benchmark. But it doesn’t look significantly out of line with the benchmark at a big picture level. Again, we want stock selection to drive anything. But any kind of reversal away from the absolute mega cap doing particularly well would be beneficial for this strategy.

PRESENTER: And overall are you happy with the portfolio’s performance, not just today but looking back over the track record?

CRAIG BAKER: Yes, so since inception the portfolio has outperformed, and any outperformance is good. But it hasn’t outperformed by as much as we would hope or expect it to do over the very long term, and that’s really because of this difficulty for active managers generally in calendar year 2018 and 2019 with a narrow set of stocks driving the market. So we would hope to see even stronger outperformance over the course of the next couple of years should any of that market sentiment reverse. But we’re very pleased with the way it’s done relative to its peer group, and given the backdrop and the environment any level of outperformance has been strong.

PRESENTER: But what’s added to returns over the period, what’s detracted from them?

CRAIG BAKER: So as I said stock selection tends to drive most of the things in this portfolio, and we’ve had more than half of the managers outperforming and less than half of the managers underperforming, which is the kind of pattern you would want to see. You don’t want to see all of the managers outperforming. That would imply that you’ve certainly got a style bias in there that you were trying to avoid at the outset. Clearly the growth managers have done better than the value managers over this period, although even within the universe of value managers we have we have had quite a difference in return, some actually outperforming in certain periods of this when value managers have generally done poorly.

At the top-down level, albeit that it’s a small part of the returns, the underweight position to the US has been a bit of a detractor, and it probably has had a very mild value bias, not because we’ve structurally had more value managers than growth managers, but more because a lot of the growth managers have started to see that even within their universe some of the companies are starting to look expensive. And so maybe there’s been a slight mild value bias and an underweight the US, both of which have detracted, but despite that we’ve been able to outperform because of the strong stock selection.

PRESENTER: When you look at the underlying managers running the portfolio, has there been much stock turnover, or have they been pretty much sticking to their guns?

CRAIG BAKER: Yes, the managers have pretty much stuck to their guns. There was a period in Q4 last year 2018 where if you remember there was quite a fall in equities at the start of that quarter. That gave an opportunity for a number of the managers to have a bit of turnover in their portfolio, finding some bargains that have come up as a result of that fall. But generally turnover’s remained reasonably low. And we’ve said at outset that we would expect low turnover from the managers that are generally long term in their outlook, and that has proved to be the case so far.

PRESENTER: Historically the portfolio was run against distinct sustainability criteria. Since Willis Towers Watson has taken charge of the portfolio, have you changed the way that the trust looks at responsible investing?

CRAIG BAKER: So there are similarities in the sense that we take sustainability very seriously. We think it’s going to have an impact on risk and return going forward, and so that’s a big part of how we think about things. But there are differences as well, because this is ultimately a global equity mandate with a full universe. We’re not restricting which sectors that managers can go into for sustainability reasons. The way we’ve chosen to tackle the sustainability issue is firstly only picking managers that we think are good enough at integrating the full ESG factors into their approach when looking at companies, but also enhancing that on the stewardship side by putting in place Hermes Equity Ownership Services. So Hermes on our behalf engage with all of the companies in the portfolio, and tackle those ES and G questions with those companies.

They also make proposals to the underlying managers as to how to vote on the various votes that are coming up at the companies they’re invested in. The managers can choose to follow that approach, or not, but if they decide not to go with the Hermes proposals then they have to explain to us why they’re not going to. And there can be good reasons in some circumstances. But it’s a combination of those things that mean that we think this portfolio is taking sustainability seriously, and it’s a big part of what’s going to produce strong risk-adjusted returns going forward.

PRESENTER: And do you think these tweaks to sustainability mean it’s going to be easier for the trust to outperform in future?

CRAIG BAKER: Yes, so we’re very confident that in the long term we can produce significant outperformance of the index. That’s certainly what we’ve been able to achieve, well in excess of 2% per annum over the very long term where we’ve been doing this in institutional space. And so we’re confident that we’re going to be able to do that in the Alliance Trust portfolio. And we think sustainability issues are going to be more and more important in what’s driving markets over the course of the next five or 10 years, and so having that fully integrated into our approach is also going to help in achieving those kind of returns.

PRESENTER: What are the main challenges you see for the strategy in the year ahead?

CRAIG BAKER: Well I think the biggest challenges are always around whether market sentiment continues to be momentum driven, large cap stocks continuing to do well, that look as though they’ve become quite expensive. If that continues then naturally bottom-up stock pickers tend to struggle in that environment, particularly long-term stock pickers that are thinking about valuation from a long-term perspective. That would probably be the biggest headwind to this strategy. But ultimately we’ve designed the multi-manager approach such that it can do well in pretty much any kind of environment, and certainly despite the very strong headwinds against bottom-up stock picking active management we have managed to outperform since inception.

PRESENTER: This is a multi-manager product, and multi-manager products are typically more expensive to investors, how do you keep fees under control?

CRAIG BAKER: Yes, so Alliance Trust has been able to do this at very low TER compared to other multi-manager approaches. And the reason we’re able to do that is really a big part of us having scale and knowing the managers very well and then finding this attractive. So firstly they find running these concentrated portfolios an attractive proposition. Secondly they find being linked to the Alliance Trust brand, which allows a lot of these managers that aren’t known in the UK retail space to essentially break into the UK retail space for the first time in many cases. And so they are prepared to do this at low cost for us, despite being some of the world’s best stock pickers. So that’s one of the advantages that Willis Towers Watson can bring to the Alliance Trust approach.

PRESENTER: What can investors in the Alliance Trust expect in the next 12 months?

CRAIG BAKER: So I think investors can expect strong outperformance of the index going forward. I think a lot of the things that have been a headwind over the last couple of years are things that could easily reverse. The portfolio is underweight the US, overweight the UK and Europe, and has some of the world’s best stock pickers in place. We feel very confident that over the long term it will be able to achieve something like 2% per annum outperformance, and in the short term if we get a reversal in markets it could be even stronger than that.

PRESENTER: Craig Baker, thank you.

CRAIG BAKER: Thank you.

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