A view of London’s skyline from the River Thames. — Reuters
THE summer of 2024 is turning into something of a heatwave of mergers for the UK market.
But for private investors, few will matter as much as last week’s announcement of a merger between two of the greats of the investment trust sector, Alliance Trust Plc and Witan Investment Trust Plc.
Both have deep histories. Alliance was set up in 1888 to run the jute and whale-oil fortunes of Dundee’s merchants; Witan was established in 1909 to manage the estate of railway financier Alexander Henderson.
The combined Alliance Witan entity will be worth around £5bil and pop right into the FTSE 100 index.
Both are strongly held by private investors – retail customers of Hargreaves Lansdown Plc and Interactive Investor, the UK’s biggest retail investment platforms, own nearly 31% of the shares in Witan and 37% of those in Alliance.
And both have morphed into global equity funds.
One, however, is rather better at its core job than the other – which will be why its name comes first in the combined firm.
Look at returns since April 2017, which is when Alliance adopted its current investment strategy, and there’s a marked difference.
According to research firm Numis, Alliance Trust has delivered a net asset return of 101.9%. Witan has produced only 60.6%.
Alliance’s total returns, including reinvested dividends, over one, three and five years come in comfortably above the benchmark global MSCI ACWI total return index.
Total shareholder return is 78.2% over five years, for example, compared with 72% for the index.
That’s something very few actively managed global equity funds can claim.
According to data from AJ Bell Plc, only 25% of them outperformed in 2023.
Over a five-year period, that falls to a only 21%. One of those underperformers is Witan – up by only 42% over five years.
So what gave Alliance an edge in the last few years?
The answer is active fund management – but an awful lot more of it than you can get elsewhere. There are a few excellent stock pickers around – clever people backing the right investments. But they come with problems.
In and out of fashion
Investment styles and sectors go in and out of fashion – sometimes it’s all about value, sometimes it’s about growth.
Sometimes the United States is the only place to be, sometimes Japan or the UK.
If good managers are true to their strategies, they should outperform over the long term.
But getting to the long term can be what Simon Evan-Cook at investment firm Downing LLP calls a “heroic journey.”
Along the way there will be peaks, troughs, triumphs, “slayings of dragons and near death experiences.”
All the things that deliver good long term performance – having a high active share (a portfolio that differs significantly from the benchmark index), running a concentrated portfolio and sticking with your style – often bring appalling short-term returns.
That’s not something most investors can cope with.
It makes sense, then, to run a fund of excellent fund managers – such that they take the edges off each other’s volatility (value covering for growth when growth is out of fashion and vice versa) but together still deliver long-term outperformance.
There are problems with this approach too. The first is cost. It’s obvious that the more you charge, the less likely you are to outperform after fees.
Look at 10-year performance, according to AJ Bell, and the average charge for outperforming funds is 0.86% and that for underperforming is 0.99%.
The two layers of fees levied by multi-manager funds aren’t helpful here.
Heroic journey
The second is that the heroic journey is tough for managers as well: Too many troughs alienate investors and limit bonuses.
So stockpickers try to limit the troughs – holding more positions than they should (their mediocre ideas as well as their good) and worrying about deviating too far from their benchmark.
Both defensive strategies can transform dragon slayers to average from excellent in no time at all.
Enter Alliance – and a strategy that neatly sidesteps these issues. In 2017, the trust’s board hired investment manager Willis Towers Watson to select 10 great fund managers. These managers were each asked to choose no more than 20 of their highest-conviction ideas for a portfolio actively managed by WTW.
The result? Not a multimanager fund or funds of funds in the traditional or Witan sense, but a portfolio of the best ideas of the best managers.
Diversification of styles
That means diversification, but combined with concentration rather than dilution.
Think diversification of styles – growth and value taking the edge off each other – but not of ideas.
Alliance ends up with an active share of 73% (which is pretty good) and, so far at least, reasonable performance.
The merger might make things better.
The details look as they should – Witan shareholders can chose a cash exit, for example (which is nice given the current 8% discount).
Alliance investors will see a rise in their dividend income as the payout increases to match Witan’s higher yield.
When the deal is done, the stock will be super liquid, something that should make pension funds and wealth managers happier to hold the shares (it’s easier to make a case for getting in when you know you can get out).
Costs will also come down: Ongoing expenses should be less than 0.6%, against 0.76% for Witan and 0.62% for Alliance pre merger.
Global equity proposition
The boards of Witan and Alliance say they hope the result will be a trust that is the “leading global equity proposition at the core of retail investors portfolios.”
That could happen. Private investors need liquidity, transparency, low costs, dividends and reasonably steady returns – things that allow them to sleep at night.
These days, they typically rely on low-cost passive products to deliver those benefits – why pay for active management if only 21% of funds outperform? – and accepting their total returns will be a little below the index after costs.
Things could, of course, go horribly wrong from here, but if the new Alliance Witan can give them £5bil worth of all those things plus a little on top of the index, it might make a new kind of history – and cheer up a few active managers along the way. — Bloomberg
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investment. The views expressed here are the writer’s own.
