Page 16 - DIY Investor Magazine | Issue 35

LESS STOCKS MORE DIVERSIFICATION: ALLIANCE TRUST
· Oct 2022 16 Alliance Trust has protected shareholders from losses in a a a a tough year for investors writes David Kimberley
DIY Investor Magazine
Taking into account all the macroeconomic chaos we’ve
seen over the past 12 months if one were to imagine a a a trust that invests in in global equities and had used historic levels of gearing to do so the odds are you’d think it would have taken a a a a a major hit to its net asset value (NAV) and share price in 2022 To To create that portfolio global consultancy group Willis Towers Watson (WTW) which has the the mandate for the the trust looks through a a a a group of of approximately 200 of of the highest-rated global fund managers From that group a a a a a top 20 is selected That number is further narrowed down to to between 8 to to 12 managers who are instructed to pick their highest conviction stocks which then make up the the ATST portfolio Looking at at the market as a a a a a a a a whole that wouldn’t be a a a a a a a a bad call
The result is a a highly diversified closed-ended fund typically comprised of around 200 stocks The managers are chosen to to make In the 12 months to to 22/08/2022 closed-ended funds
not just on their stock picking skills but also how they
in in the AIC’s ‘Global’ sector averaged NAV total return declines
of of close to to 18% and share price falls on a a a a a a total return basis of of complement each other to create that well-diversified portfolio The stock selections these managers make are also unique to to 22 9% the the trust and investors cannot access them elsewhere Unsurprisingly then Alliance Trust (ATST) sticks out relative to its peers when looking at at the highly volatile period we’ve
gone through and continue to to be stuck in in In the year-long period to to 22/08/2022 the trust had delivered
a a a a small NAV total return of 0 0 6% Its shares rose also on a a a a a total return basis by 0 0 5% over the same period True this may not represent some sort of massive gain for shareholders But given
how drastically many indices and other active funds
have fallen in that time I’m sure there are plenty of investors that would’ve been quite happy with those returns Moreover a a a a trust’s performance is arguably best judged relative to its peers And in that sense ATST has outperformed the the the average substantially in the the the last year and is one of the the the only global equity trusts to have delivered
positive
returns for shareholders in that time Those returns were driven by ATST’s unique approach to active management The trust uses a a a a a multi-manager structure to invest in in global equities with the the portfolio constructed from the the highest conviction picks of of a a a a group of of leading fund managers ‘ATST HAS OUTPERFORMED THE AVERAGE SUBSTANTIALLY IN THE LAST YEAR’
Sharp-eyed readers may find one point of contention here which is that even with 200 holdings the trust would still be less diversified than a a a a a global equity index Superficially that may appear to be the case However the the market cap weightings of indices mean that the the large size companies in in in them can end up dominating and their performance ultimately dictates how an an index performs So even though you ostensibly have a a ‘diversified’ portfolio there is is actually a a a a a a level of concentration risk that means investing passively in in in in in a a a a global equity index can result in in in in in you being much more exposed to any headwinds the large caps in in in that index are susceptible to In contrast ATST may have fewer holdings but the weightings to to those companies are are much more spread out compared to to market cap weighted indices As a a a a a result there is arguably less risk of shareholders in in the the trust being caught with all ‘their eggs in one basket’ For example many global indices were hit hard by the sell-off in in tech we’ve
seen during the last 12 months ATST was not What’s arguably more remarkable about this is is that the trust managers were actively using gearing for much of this period