For a decade, backing Big Tech has been the easiest way to propel returns. Such has been the sector’s dominance, funds such as Alliance Trust that do not go all-in on racy growth stocks have struggled to beat their target indices. Now, though, the end of ultra-loose monetary policy and rapid rises in interest rates have called time on the technology boom and could provide the best impetus in years for Alliance Trust to outperform its passive counterparts.
Willis Towers Watson, investment manager for the FTSE 250 fund, picks between six and a dozen finance houses — nine at present — that pursue a variety of investment styles worldwide but concentrate on ten to twenty stocks each. Allocations range from the value bias of Jupiter, of the UK, and Black Creek, the Canadian investment manager, with 25 per cent of assets combined, to Asia and emerging markets, at 17 per cent.
There are already tentative signs that this strategy is proving its worth. In the first month of the year, the trust delivered a total return to shareholders of 3.9 per cent after costs and the value of its assets rose by 2.6 per cent, ahead of the 0.3 per cent generated by the MSCI ACWI Index, its yardstick. Stalwarts such as Alphabet, Microsoft and Amazon might appear in the list of top five holdings, but Alliance Trust is underweight compared with the benchmark. In a crisis-stricken market last year, taking that approach and eschewing the likes of Tesla and Apple altogether helped the portfolio to hold more water than its peers and the benchmark. The value of Alliance Trust’s assets might have slid 7.1 per cent and the shareholder return by 5.8 per cent, but both were less severe than the 8.1 per cent fall in the MSCI index and the 23 per cent average decline recorded by global equity trusts listed in Britain.
How do things stand now? Allocations to value-tilted strategies run by Jupiter and Black Creek were added to last year, while Sands Capital, which has the largest bias towards growth stocks, remains its lowest weighting. The chance that more low-valued companies might prevail is also reflected in the geographical mix versus the benchmark: the trust is overweight towards the cheaper UK market and underweight in US stocks. Despite a bull run in recent months, the trust’s manager is not banking on a smooth rebound in global stocks this year. Reflecting that, gearing has been kept a touch below the bottom end of the 7.5 per cent to 12.5 per cent target range at 7.3 per cent of net assets.
A dividend that has been increased for the past 56 years also provides a helpful backstop for total investor returns should markets prove volatile again this year. Last year’s dividend totalled 24p, which equates to a yield of roughly 2.4 per cent at the present share price. Hardly income status, but it does look reliable. Last year’s payment was amply covered by cash handed back by its holdings during the year and revenue reserves alone stand at £102 million, which would have easily covered dividend payments of £71 million last year.
Since Willis Towers Watson was appointed in 2017, the trust has struggled to push convincingly ahead of the index, generating a return of 63.2 per cent for shareholders compared with the 62.8 per cent turned out by the MSCI ACWI. But with the economic and monetary policy backdrop having shifted, several attributes could give the trust a chance to extend its lead over the benchmark — chiefly a portfolio that trades at a lower average price-to-earnings ratio and earnings that have fluctuated far less over a five-year period than the index. With the shares at a discount to the value of the fund’s assets, that appeal should shine through.
ADVICE Buy
WHY A balanced approach could extend the trust’s lead over its benchmark index
M&G
Takeover speculation is likely to follow M&G, even if the asset manager’s new boss is doubling down on attempts to prove to the market that it the business in good enough shape to go it alone.
How does Andrea Rossi, the recently appointed chief executive, hope to revive its performance? By reducing costs by £200 million (gross of inflation) and cutting the cost-to-income ratio from a toppy 77 per cent to below 70 per cent by the end of 2025. Removing some of the organisational complexity lingering within after its demerger from Prudential is one area of attack; so is reducing the amount of money spent on third-party business consultants and contractors. In a sector where fees are under pressure, that is unlikely to be the last we hear about cost-cutting.
The potential to reduce operating expenses is one reason why M&G remains a potential takeover target. Another is its valuation. Compared with other asset managers, M&G shares look cheap at just under 11 times forward earnings. A foot in private assets, which carry higher margins, also could prove appealing to any rival looking to extend its reach away from vanilla equity and fixed-income strategies.
For now, investors’ attention will focus on the sustainability of that meaty dividend, which amounted to 19.6p a share for last year. In the immediate future? It looks secure enough. Higher interest rates have boosted capital for the legacy insurance business and capital generated by the group overall amounted to £821 million, well clear of the £460 million or so in dividends declared for this year.
Over the long term, investors would be right to question the strength of dividends. Of the £628 million in capital generated by the underlying operations, more than half came via its heritage business, which is in run-off. Meanwhile, asset management, a key hope for growth, generated a net £213 million.
The performance of that business has been far from reliable. Last year, wholesale asset management returned to net inflows for the first time since 2018, while the liability-driven investment fund crisis pushed pension fund clients to withdraw cash from M&G.
ADVICE Hold
WHY The company remains a likely takeover candidate
