Major change at Dundee firm
Smith unveils radical shake-up of Alliance Trust
Instead of managing its funds it will outsource to other asset managers. Eight of the world’s top-rated equity managers have been appointed.
The company said it will remain a global equity investment trust headquartered in Scotland and will retain Alliance Trust Savings.
However, it will lose day-to-day management of some assets. Alliance Trust Investments is being sold to Liontrust Asset Management for up to £30 million.
Alliance Trust’s sustainable investment team, led by Peter Michaels, will transfer with the business, alongside 11 ethical mandates.
Willis Towers Watson (WTW), a leading investment group, will become the Trust’s overall investment manager.
The moves follow a review initiated in 2015 following a campaign by an activist investor which led to a boardroom reshuffle. It believes the changes will improve performance, partly by spreading risk.
Lord Smith of Kelvin, chairman (pictured), said: “Since May, the Board has evaluated carefully a broad range of options, with an open mind and a clear line of sight on how best we could improve the Trust’s performance.
“We believe there is good appetite for a global equity investment trust and that will remain our overall positioning. However, we are proposing a new approach to the investment management of the equity portfolio.
“Our proposal is that we will move from a single manager to multiple equity managers. All managers will be rated best-in-class and each will create a focused portfolio of their best investment selections.
“We are confident that this exciting and differentiated investment approach will help to improve Alliance Trust’s performance on a consistent basis.
“Accordingly, we have doubled the level targeted for outperformance, reaffirmed our ambition to continue our track record of year-on-year dividend growth, yet at a competitive cost.
“We firmly believe that this will put Alliance Trust on a strong footing for many years to come.”
Alliance Trust to remain a global equity investment trust offering real returns over the medium to long term
Target to outperform MSCI All Country World Index to be doubled from 1% to 2% p.a., net of costs, over rolling three-year periods
Aiming to build on Alliance Trust’s 49-year track record of year-on-year dividend growth
A new approach to investment management to be adopted to increase the likelihood of delivering consistently the performance target:
Move from a single manager to multiple equity managers, each rated best-in-class1
Each equity manager to create a focused portfolio of their top investment selections
Agreement reached to sell Alliance Trust Investments to Liontrust Asset Management for up to £30 million; representing a premium of at least £5m to book value
Alliance Trust Savings continues to make good progress and will remain as part of the group; now profitable and well placed to develop further
A proactive programme of share buy-backs to be introduced with the aim of achieving a significantly narrower discount
Shareholders to be provided with the opportunity to vote on the new approach to investment management
Following the 2015 AGM, the board undertook a consultation process to further understand what shareholders were looking for from their investment in Alliance Trust. The company says it was clear that the appetite for a global equity investment trust remained strong, but that change was required to better differentiate Alliance Trust’s investment proposition and to improve performance.
In October 2015, the board introduced a number of initial changes with the aim of enhancing shareholder value. These included focusing on equities, reducing costs, and simplifying the Trust’s corporate structure.
The board initiated a Strategic Review of the Trust, as announced in May, to assess the potential courses of further action open to it.
Outcome of Strategic Review
The Strategic Review has now been completed and the board has concluded that the best way to deliver further improvement in shareholder value is to implement a new approach to the management of the Trust’s equity portfolio, which represented 98.9% of net shareholder assets as at the end of last month.
Alliance Trust says it will remain a global equity investment trust offering real returns over the medium to long term. Responsibility for investing the Trust’s equity portfolio will move from a single manager, currently Alliance Trust Investments (ATI), to a multi-manager model.
Approximately eight of the world’s top-rated equity managers will be appointed, each of whom will create a portfolio for the Trust of typically around 20 stocks, representing their best investment ideas.
In order to implement this new approach, and following a competitive process, the board has decided to appoint Willis Towers Watson (WTW), a leading investment group, as the Trust’s overall investment manager. WTW has over 900 investment associates worldwide, assets under advisory of around $2.3 trillion and over $87 billion of assets under management.
The board believes that this differentiated investment approach builds on the best of Alliance Trust’s long heritage of innovation and will increase the likelihood of delivering consistently improved performance.
In light of the board’s confidence in the new approach, the target for the equity portfolio to outperform the MSCI All Country World Index will be doubled from 1% to 2% p.a., net of costs, over rolling three-year periods.
Alongside this, the board reaffirms its commitment to the existing progressive dividend policy. This aims to generate a growing revenue stream from the portfolio which will allow the Trust to continue to increase dividends year-on-year.
Advantages of the New Investment Approach
The board has identified a number of key advantages of the new approach and believes that the combination of these will create a unique investment proposition in the UK investment trust market.
The key advantages, as identified by the board, are:
Access to the world’s best-in-class equity managers: Through WTW, Alliance Trust will be able to access the world’s leading equity managers, many of which have not been available before to UK retail investors. Each has been deemed to be a best-in-class equity manager by WTW’s 100-strong research team.
High conviction: Each equity manager will manage a portfolio focused solely on their best investment ideas, typically in the order of 20 stocks, such that Alliance Trust is only paying for true active management. By working with different managers, each of which will manage a focused, but complementary, portfolio, the board believes the Trust should achieve the level of performance required.
Lower risk: While the consolidated portfolio’s risk profile is anticipated to be similar to the existing portfolio, stock-specific risk will be lower than it is currently with a larger number of holdings; up to 200 compared with around 60 at present.
More consistent outperformance: The board believes that by working with multiple equity managers, as opposed to one, the likelihood of achieving consistent outperformance will be increased. Most UK investment trusts run the risk of being solely reliant on the skill of a single investment manager. The multi-manager approach spreads this risk across a number of managers and makes it easier and less costly to change when required.
Differentiation: No other UK investment trust offers the same approach.
Income and growth: By selecting the right balance of complementary investment managers, Alliance Trust can continue to focus on both income and growth with the aim of building on its 49-year track record of dividend growth.
Better value: By leveraging the scale of Alliance Trust and WTW, total annual costs will be targeted to be below 60bps. This is highly competitive for an investment trust targeting such outperformance.
A WTW company will be appointed Alliance Trust’s AIFM, and will become responsible for the overall management and oversight of the Trust’s investment portfolio and the underlying equity managers, on a discretionary basis. Each equity manager will create and run their individual portfolio. Alliance Trust will retain a small central team, which will be responsible for functions such as company secretariat, in Dundee, at the Trust’s registered office.
It is the board’s intention to introduce a programme of share buybacks, and to undertake them in a more proactive manner than in the past, reflecting the Board’s determination to narrow materially the discount in short order.
Alliance Trust Investments
The board has reached agreement to sell ATI to Liontrust Asset Management for up to £30 million; comprised of up to £10m in cash, £17m in Liontrust shares, £13.6m of which will be issued on completion and the balance 12 months later, and £3m in cash as a contingent consideration, dependent on the future level of assets under management payable two years after completion.
It is expected that net proceeds will be not less than £25m. This compares to the ATI book value of £19.8m as at the end of June 2016.
The company says the sale of ATI will simplify its structure and provides ATI with an “exciting opportunity” to continue to develop its growing third party fund management business.
Completion is expected to take place in early April.
Alliance Trust Savings (ATS)
As previously announced, the focus of ATS has been to integrate the acquisition of Stocktrade, introduce the stand alone independent governance and management of the business and to continue to develop the operating platform.
Given the progress achieved to date and the opportunities ahead for ATS, the board believes that it is in the best interests of shareholders for the business to remain part of the group. ATS will continue to be headquartered in Dundee, with a presence also in Edinburgh.