Face off: Alliance Trust vs Foreign & Colonial Investment Trust
4th April 2012 17:21
by Cherry Reynard from interactive investor
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If the face off between Fidelity Enhanced Income and Schroder Income Maximiser was a battle of David and Goliath, this battle is surely a clash of the Titans. and are two of the oldest and largest trusts in the UK.
Both are often seen as 'starter' investments with low minimum investment levels, low charges and well-established regular savings and children's saving schemes. Both have a progressive dividend policy and a global investment remit.
With only a hair's breadth between them on paper, let battle commence.
Both trusts sit in the AIC global growth sector and have some stiff competition. , and the Baillie Gifford trusts - and - have been the top performers. In contrast the charms of the large global generalist trusts, such as Alliance or F&CIT, have not shone through as they have struggled to adapt to a new investment era. They have had neither Lindsell Train's excellent stock picking nor Ruffer's shrewd asset allocation.
A significant hurdle that they have faced is that it is a long time since anyone believed that one company could house the leading US specialist alongside the leading UK specialist, alongside the leading emerging market specialist. A number of the competitor trusts, such as , have gone fully multi-manager to resolve the problem. F&CIT has selectively outsourced some parts of the trust's management, while Alliance remains committed to a self-managed approach.
The trusts have certainly taken steps to move themselves forward. Around five years ago F&CIT took a big weight in the private equity sector, through some of the large private equity trusts. It has also moved to have structurally higher weights in emerging markets and has implemented a share buyback scheme to manage the discount. Alliance has brought in new investment personnel - notably the headline-grabbing Katherine Garrett-Cox. It has also launched its own open-ended funds business - currently owned by the trust.
Stephen Peters, investment trust analyst at Charles Stanley says of the two trusts: "They both use slightly different means to get themselves to roughly the same place. Alliance trust has a bit more invested in the UK, F&CIT has a bit more in the US and Europe. Three-year volatility is approximately similar - neither is managed in a 'racy' way. F&CIT is marginally older - 1868 versus 1888. Alliance Trust is marginally bigger. F&CIT has been the better performer over the longer term."
For those who want a one-stop global investment portfolio, cheap, easily understood with the reassurance that nothing too sexy or frightening will be done with investors' cash, these trusts may still have a place. But which one to choose?
Alliance Trust
The largest investment trust in the UK has attracted its fair share of headlines: some have been good - the appearance of former Aberdeen and Morley star Katherine Garrett-Cox as chief investment officer in 2007 was greeted as a coup for the Dundee-based group.
But more recently, those headlines have mostly been negative. In particular, activist shareholder Laxey Partners has launched a high-profile and well-supported campaign to 'encourage' management to improve investment performance and better manage the trust's hefty discount.
Patrick Smith weighs up the impact of investor intervention in:Can shareholder activism curb boardroom excess?
The trust remains one of the only 'self-managed' trusts in the sector with all the different asset classes in the trust managed within Alliance Trust. Laxey argues that the group's 250-strong staff brings excessive cost relative to the asset base, without any apparent performance benefit.
Certainly, historic performance is uninspiring. On a net asset value (NAV) basis, the trust lies 21st out of 32 trusts in the global growth sector over five years, having delivered just 14.7%.
Short-term performance is better, with the trust up 2.5% over one year, leaving it 12th in the sector, but this may simply be because markets have rewarded larger-sized defensive equities of the type the trust tends to favour. It would certainly be a stretch to say performance had turned around.
Share price performance has been marginally stronger. Laxey put pressure on the board to introduce a system of share buybacks when the discount to NAV hit 10% or higher. The group was defeated by approximately one-third to two-thirds, but the board brought in a share buyback programme anyway, which succeeded in bringing the discount down from 20% to its current level of 15.5%.
Peters says it is difficult to identify the areas of the trust that are performing well and badly. However, some clues are held in the group's open-ended fund range, run by the same group of managers. Although performance figures are relatively short-term, Alliance's UK Equity Income, Monthly Income and Japan funds are all bottom quartile over one year. The areas of strength have been in Europe, under Fiona MacRae and North American equity under Matthew Strachan.
The trouble is, UK equity is the largest weight in the trust, at around 35%.
Some of the managers in the trust are making the right noises. Ilario de Bon, one of the global managers on the trust, for example, says: "We are high conviction and unconstrained, looking for the best long-term ideas. We take a thematic approach to stock selection... so, for example, emerging market luxury, or the changes in eating patterns as countries develop might be themes for the portfolio. We want to have a bias to sustainable growth."
De Bon says that they are sensitive to valuation and avoid overpaying for companies, however high quality. They will be benchmark agnostic and move towards the best ideas regardless of sector or geographic weighting.
This all sounds like the sort of approach that might deliver better results. Garrett-Cox, once she ceases to be distracted by the Laxey fiasco, may yet lead a turnaround in performance. There is, of course, also a chance that Laxey will effect change in the trust - force the outsourcing of weaker areas and succeed in encouraging more share buybacks that will, in turn, narrow the discount.
The real question is why an investor would wait and see, when they could simply sell out and buy something better.
Tom Tuite Dalton, an analyst at Oriel Securities, certainly thinks so. "Garrett-Cox has been trying to cut costs and to turn Alliance Trust Savings and the third party funds business into profit centres but she is a long way off. With regards to the latter, she has taken on some new 'global' managers in London and a fixed-interest team in Edinburgh, but I am told the break-even is when they hit £2.5 billion under management, which could be decades away in my view. Basically there are now far too many moving parts."
He suggests that these initiatives are a "costly and time-consuming distraction for management". He also suggests that the unbroken hike in dividends is perhaps not the selling point it might be: "Alliance Trust's dividend yield is relatively small at 2.4%, it has managed to grow it consistently over time, albeit perhaps an irrelevance to income growth investors looking for a more meaningful starting yield."
In his recent 'sell' note on the company he says that the only sure way to narrow the discount is to introduce a publically-stated discount target or regular tender and/or for the trust to rebuild its long-term performance record. "Until that time, or unless the discount widens significantly from 16%, we would sooner pay up for those funds with a demonstrable long-term record," he says.
He sees no likelihood of a pick-up in investment performance, believing that the trust doesn't have the right policies in place. Tuite Dalton recommends a switch into , which "keeps things very simple".
Alliance Trust
Total assets: £2.92 billion
Manager: Various, led by Katherine Garrett-Cox since 2007
Launched: 1888
Yield: 2.4%
TER: 0.63%
Contact: 01382 321000 or www.alliancetrust.co.uk
Foreign & Colonial Investment Trust
The Foreign & Colonial trust is a model of stability. Manager Jeremy Tigue has been in place since 1997, supported by Julian Cane since 2005, should anyone be worrying about succession. The discount mechanism has ensured the discount to NAV has remained in a narrow range. Performance has been consistent, if unspectacular. This investment trust old boy is almost the definition of a "don't frighten the horses" fund.
There has been modernisation, however. The trust took a noteworthy stake in a number of private equity trusts around five years ago: and still make up some of its largest holdings. A number of the geographic portfolios are outsourced. For example, the Japanese part of the portfolio is outsourced to Goldman Sachs Asset Management.
The trust has also increased its weighting to emerging markets in recent years - Brazil, for example, is now the third-largest geographic weighting in the portfolio. The trust also abandoned its performance fee in 2011, leaving it with a total expense ratio of just 0.61%.
Tigue manages the asset allocation and hands the resulting pots to individual managers both inside and outside the wider F&CIT group to manage. Some of these asset allocation shifts will be significant. For example, in 2003, he took emerging markets exposure from 5% to 15% of the fund with similar moves seen in private equity. This goes both ways, and the trust has been underweight Europe during the recent crisis.
He says that the underlying fund managers tend to prioritise companies with strong balance sheets, that are paying and raising dividends and have good growth prospects. Increasingly, they also prefer companies that are generating an increasing proportion of their earnings from emerging markets.
Across the board, Tigue says that they will tend to favour more defensive companies: "As a rule, we would expect to be on the conservative side. We are focused on minimising the downside, rather than maximising the upside."
This can be seen in the trust's performance. The trust is mid-table on a NAV basis over five years, up 18.7%. It has generally performed better in weaker markets, such as those of 2007, 2008 and 2011 and lagged the stronger markets of 2009 and 2010. The trust is up 2.8% over one year, leaving it 10th out of 34 trusts in the sector. Share price performance has been slightly stronger, thanks to the narrowing of the discount.
Tigue says at the moment he is "looking for the next big idea". He has scaled back his emerging markets exposure on the back of recent price rises and keeping his options open with holdings in large, liquid stocks. He is also making active use of gearing as markets flap around. It reached 18.8% in September last year as Tigue sought to take advantage of depressed market conditions. Its lowest was 5% in May 2007.
Foreign & Colonial Investment Trust
Total assets: £2.33 billion
Manager: Jeremy Tigue since 1997
Launched: 1869
Yield: 2.2%
TER: 0.61%
Contact: 0800 136 420 or www.fandc.com
The verdict
The structure was built for a different investment era - an era pre-platforms, when investors were looking for trusts that could do everything in one place. Now, the majority of investors can use platforms to achieve a similar - or possibly better - effect.
Peters says: "For a novice investor, these trusts are perfectly sensible. They are cheap and people can often invest via savings schemes. Fees are low and are therefore not eating away at returns. However, for a sophisticated investor, with a diversified portfolio and the means to look more deeply, they may do better buying other trusts or funds."
That said, of the two, F&CIT has done more to adapt the structure to the modern investment environment and performance has been notably better.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.