Judging the multi-manager approach

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  • 17 mins 29 secs
Craig Baker, Global Chief Investment Officer & Mark Davis, Head of Delegated Portfolio Management EMEA, Willis Towers Watson give an update and overview of the Alliance Trust Equity Portfolio. Baker & Davis discuss strategy, performance, risk and look to the future positioning of the portfolio.


Alliance Trust
Alliance Trust PLC


Alliance Trust PLC
River Court
5 West Victoria Dock Road

Phone: 01382 938320

PRESENTER: For an overview and update of the Alliance Trust’s equity portfolio I’m joined now by two of the senior members of the Investment Committee, Craig Baker and Mark Davis. Gentlemen, thank you very much for joining us. Craig, first of all what’s, remind us, what’s the investment strategy that underlies the portfolio?

CRAIG BAKER: So increasingly Alliance Trust has ended up being a global equity portfolio, fully invested. And it is a high conviction, multi-manager approach. So from the 1st of April 2017 we’ve been following this innovative approach that is seen in the institutional world, and we’ve been running portfolios like that for some time, but is brand new really to the retail space. And so it’s taking the multimanager approach that everyone will have heard of, but really putting a twist on it. And so each of the underlying managers are running highly concentrated portfolios of just their very best ideas, so 20 stocks or less in most cases.

PRESENTER: And, Mark, how do you have any control over asset allocation if you’ve got eight underlying managers buying what they want?

MARK DAVIS: So we get daily visibility on the portfolio to see everything that the managers are doing. We very much want the stock selection to be the key driver of the return. We’re asking these managers to pick just their best 10/20 stocks, we want that stock selection to be the key driver of return. So we’re monitoring what the actual exposures are through time to the various different regions. And where we need to we can control the allocations to the managers so that it’s not asset allocation that’s driving return, it’s the stock selection.

CRAIG BAKER: And it’s probably worth just making a point there that when we originally chose the managers and how they fit together, it was such that they were bringing something very different. And actually when you blend them together, they end up with the big macro positions, be it geography, country, sector, start to look quite similar to that of the index so that it is the stock selection that’s driving everything.

PRESENTER: And so what kind of investor might be suited to the Alliance Trust?

CRAIG BAKER: Well it’s very much designed as a long-term investment vehicle. So we see this as a very good investment for the long term where you want 100% equity exposure, and a truly global approach at that. But because it has got this multimanager approach, whilst each of the portfolios from the managers are very high conviction so that the performance expectation can be high, blending them together means that it actually has relatively low volatility. Volatility similar to that of investing in the whole index, much lower than you might see from a typical single manager approach.

PRESENTER: But is this a growth, an income portfolio?

CRAIG BAKER: So it’s a blend of both. So it’s trying over the long term to beat the world benchmark, and so it’s very much trying to achieve strong long-term growth, but we are ensuring good income payments from the increasing dividends. And so we’ve now had 52 years of consecutive increasing dividends in Alliance Trust and that will continue in the new approach.

PRESENTER: Mark, you adopted a multimanager approach first part of 2017, how has it done since then?

MARK DAVIS: So we went live 1st of April 2017. We’ve delivered a return now of just over 10% since inception. That’s outperformance of 1.6% versus the benchmark. And 2017 very strong, 2018 was a difficult year for equities in general, but we’ve seen that bounce back with a recovery through to January into 2019.

PRESENTER: When you mention the performance, is that the share price or the underlying assets of the trust?

MARK DAVIS: So that’s the equity portfolio itself. So we look at the performance of the equity portfolio. There are some non-core assets within the Alliance Trust as well, small allocation. They’ve been being sold off and reduced through time as a policy by the board. So what I’ve quoted there is the performance of the multimanager core equity portfolio, which is the vast majority of the trust now, and in the future will be all of the assets for the trust.

PRESENTER: And, Craig, you’re not just trying to beat the global equity benchmark, or a global equity benchmark, but over time you’re trying to do that by 2% a year after fees. Over what period should investors judge whether you’ve succeeded or not?

CRAIG BAKER: So the actual objective that’s been set is to do that over rolling three-year periods. But I mean we all know that performance is very volatile from equities, and so the longer the period the better to measure those kind of things, but the ultimate objective is rolling three-year periods.

PRESENTER: And isn’t a multimanager approach fairly expensive: you’ve got eight underlying managers to pay, as well as everything else that’s being supplied by Willis Towers Watson?

CRAIG BAKER: So typically that’s one of the fair criticisms of a multimanager approach is that it can be expensive. Certainly if you look at the average open-ended fund that runs a multimanager approach, I think the typical TER is up in the 1.3, 1.4% per annum. What’s different here is that we’ve been able to use our brand and scale. At Willis Towers Watson we have a few trillion under advice, a few trillion dollars under advice, to be able to get those fees down quite markedly. And so for example over 2018 the OCR on the trust was just 0.65%, which actually looks pretty good relative to a number of single manager investment trusts, let alone the multimanager approach.

PRESENTER: And OCR stands for what?

CRAIG BAKER: That’s the ongoing charge ratio. And so that’s taking account of all of the costs of the trust.

PRESENTER: And, Mark, overall how has the portfolio shifted over the course of the last 12 months?

MARK DAVIS: So it’s not been significant changes. It’s a global equity trust and as we mentioned we want the stock selection to show through. So there’s been a number of changes within the underlying stocks within the portfolio as the managers have been able to respond to volatility, particularly in the fourth quarter of 2018. But from a country perspective it’s not really adjusted very much. We’re a bit underweight the US, and we have been throughout the last year or so. And we’re overweight to the UK, European and to emerging markets.

PRESENTER: Why building the slightly overweight position to emerging markets then?

MARK DAVIS: So we see there’s been a bit of turbulence in emerging markets. We see there’s good growth prospects and we see some attractive valuations there, but it’s been driven by the stock selection of the underlying managers. It’s very much the stock selection views away from the US towards a small number of emerging market stocks that several of the underlying investment managers see as being very attractive.

PRESENTER: But for an investor looking at the portfolio today, how diversified are you at the sector level?

MARK DAVIS: We’ve got a broad spread of sector exposures, because we’re not too dissimilar to the index. So we’ve got broad exposures to financials, consumer staples, consumer discretionary, industrials. We’ve got slight overweights to healthcare and IT at the moment, a slight underweight to financials if we were comparing to the benchmark index. But very broad exposure as you’d expect for a core investment for holding over the long term.

PRESENTER: You obviously give great autonomy to your underlying fund managers, but what happens if they all decide to buy the same stock at the same time? Don’t you end up with an unintentionally very concentrated portfolio?

CRAIG BAKER: In theory that could be the case. It actually in practice doesn’t happen. So each of the managers bear in mind have got a universe of thousands of stocks that they can invest from, and they’re told to pick up to 20 stocks. And just their very best ideas and not worry about the benchmark or the peer group. It’s very unlikely they’re going to end up liking the same stocks. And in particular we’ve chosen managers that look at the world differently to each other. That said, you know, if we do get two or three managers at the same time liking the same stock that tells you something, and we let that happen. But we’ve never really had more than about 2½% in any one stock from the whole portfolio.

MARK DAVIS: For example at the moment we know we’ve only got two stocks in the entire portfolio where three managers are holding them, and there’s only around a dozen stocks where two managers have held the same stock. That’s been pretty consistent actually since the start of the portfolio.

PRESENTER: And as you look out over 2019, what are some of the main threats and opportunities that you see out there in the markets?

MARK DAVIS: So there’s clearly a lot of top-down risks that exist in the markets at the moment, and whether that’s from trade wars with China in the US through to Brexit, various other geopolitical risks. But that’s one of the key advantages I would say of a core investment like the Alliance Trust, where we’re very much looking to control risk. As Craig mentioned, we’re trying to manage the portfolio here so it’s a similar risk to the benchmark index, but without performance being delivered through the stock selection. So whilst we can see that there are various different threats, we feel that the portfolio for the Alliance Trust should be somewhat immunised from those risks, relative to a more style focused individual manager approach that can get more affected.

PRESENTER: How do you define risk?

CRAIG BAKER: So we look at risk in multiple ways. One of the risks we’re looking at is in terms of balancing the portfolio so that we can consider the risk relative to the alternative of buying the passive index that covers the whole of the global equity market. Another risk is in absolute terms. And certainly the underlying managers, they’re thinking much less about the risk relative to a benchmark, they’re just putting their best ideas in there. And so the kind of risk they’re thinking about is the risk of loss of capital in the companies that they’re investing in over the long term.

PRESENTER: But if you were worried about the outlook for the global equity market, could you put a lot of the underlying portfolio in cash, for example, or buy insurance against a fall in the market?

CRAIG BAKER: So each of the managers can invest up to 10% of their portfolio in cash, but they do have to be close to fully invested. We affect the gearing level of the overall investment trust. So that can go up or down; although again it won’t be a significant change. The strategic policy is about 10% gearing. We might move it to 7½% or up to 12½% depending on views. Ultimately we want stock selection to drive everything in this. And so this will be a close to fully invested equity portfolio.

PRESENTER: Mark, February 2019, what’s the gearing level at the moment, what does it tell us about how confident you’re feeling about markets?

MARK DAVIS: So we’re just around 8% geared at the moment within the trust. And that is in the range that Craig mentioned. It’s towards the bottom end of that range that we would operate in. And that just reflects that we are cautious of some of these top-down risks. But we also see that through the fourth quarter a number of our managers did spot and found some good opportunities where they repositioned their portfolios.

PRESENTER: And moving on to how the portfolio is positioned today in the round Craig, can you run through both in terms of style and in terms of geographic spread?

CRAIG BAKER: So, looking at the portfolio, as we said before we try and keep it relatively neutrally balanced against the MSCI All Country World Index. And so if you look at it relative to that, the main differences are a slight underweight to the US, from a country perspective, and overweight most of the other regions, Europe and UK and emerging markets. From a style perspective almost style neutral, so very little of a bias in there. The reality is that we’ve got a mix of managers, some having more of a value bias. And some of those value managers have gone quite deep value, because they’re really finding good opportunities at the moment. And then a number of growth managers in there who perhaps aren’t quite as into the high growth companies as they might have been. So if anything you might have a slightly defensive piece, but generally we try and keep that very style neutral overall.

PRESENTER: And do you think your global equities benchmark has long term got enough exposure to the growth parts of the world, Asia, the emerging markets?

CRAIG BAKER: So we think it’s important to start as a premise with what is the overall market cap of the world. We think that’s the best reflection of the opportunity set that’s out there for a long-term investor. So we think that’s important. But remember each of the underlying managers has got the opportunity to look nothing like the benchmark whatsoever. And so there will be times where they’ll take quite big positions. And certainly at the moment some of them are doing that. It’s just they’re offsetting each other to a certain extent. In terms of the growth opportunities, there’s a huge amount of growth opportunities in the US market. It’s important to recognise that is 50% of global market cap and it represents close to 50% of our portfolio. But there are plenty of opportunities for the managers to go into certain parts of Europe and Asia that would be considered more in the emerging world.

PRESENTER: And, Mark, what’s the exposure of the portfolio to the UK at the moment?

MARK DAVIS: So we’re overweight where the market cap index would be in the UK. We’ve got about 14% of the portfolio at the moment in the UK. And that’s coming from actually about two or three of our managers that are all underweight the US, overweight UK stocks in particular.

PRESENTER: You mentioned that you’ve got a little bit of an overweight in emerging markets, where else are the major over and underweights in the portfolio?

MARK DAVIS: So underweight the US and Canada and Japan; those are the three areas. Overweight Europe, the UK and emerging markets; those are the key biases at the moment. As I would say though that’s very much driven by stock views, stock selection views of the underlying managers.

CRAIG BAKER: And not major industry overweights or underweights either. When you, each of the underlying managers is very different, but overall it doesn’t look wildly different from the benchmark. Again from a top-down perspective you’ll often look at the portfolio and think it looks quite like the MSCI benchmark. When you look at it from a stock selection perspective it looks nothing like the benchmark at all. And that’s, we always want to be saying the reason we outperformed or underperformed in a particular period is because of the stock selection that’s driven everything. That’s why we’ve chosen the managers for their skills in stock selection.

MARK DAVIS: And one measure of that would be the active money of the portfolio. So when you add up the weightings to stocks versus their weighting, and compare it to the weighting in the benchmark, what proportion is active? The overall portfolio is 80% active money at the moment. So showing it from a stock perspective the portfolio looks nothing like the index, even though from a country and sector perspective it looks quite similar.

PRESENTER: And are your underlying managers all buying large cap stocks, or can they buy small and mid-cap?

MARK DAVIS: They have full freedom to allocate where they feel the best opportunities are. And there’ll be some of the managers where they have more of a focus on small cap stocks, like River and Mercantile, Hugh Sergeant would be one example of that, and there are some where they have more of a focus on more larger cap stocks, or quality stocks; someone like Andy Headley at Veritas tends to through time probably have a slightly more large cap bias.

PRESENTER: Well, sum it up for us, as we sit here February 2019, how optimistic are you feeling about the outlook for the next six to 12 months?

CRAIG BAKER: Well very optimistic. I mean I think 2018 was a tough period generally for active managers. We had slight underperformance, most of that has come back already in 2019. And just if you have anything that leads to volatility and markets picking up, and a bit more differentiation between the better companies and the poorer companies in terms of share price movement, then that’s just a fantastic opportunity for active management. And in particular for managers that are running very highly concentrated portfolios, high conviction, not taking any notice of the benchmark themselves, that’s really when that outperformance is expected.

MARK DAVIS: I’d just echo that. I think we see, and we saw, when we look at the underlying managers and their portfolios through the fourth quarter, we did see a little bit of a pickup in turnover levels, indicative of reacting to that volatility and share price depreciation, spotting opportunities in companies that many of those managers have been monitoring, wanting to buy for some time. And then there was the opportunity, which we then see, expect to see being harvested through 2019 and further into the future.

PRESENTER: We have to leave it there. Mark Davis, Craig Baker, thank you very much.