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Alliance Trust underperformance reflects turbulent market conditions around the EU referendum

Alliance Trust has announced its interim results for the year ended 30 June 2016. During the period, the trust’s NAV per share increased by 5.4%, whilst its share price increased by 1.4%. The trust also paid dividends of 5.65p (2015: 5.065p). Share price total return, including the dividends was 2.6% whilst NAV total return was 6.6%, both underperforming the Trust’s MSCI ACWI benchmark, which returned 12.0%. The board say that the underperformance reflects turbulent market conditions around the EU referendum when the Trust’s quoted equity portfolio gave up the outperformance it had recorded over the prior five months. However, they also say that, since the period end, the Trust’s share price has reached new highs.

The company announced during the period that the Board has initiated a strategic review of the Group. The board says that is progressing well and it will report back on the outcome later in the year.

During the period, the trust implemented changes to the Board, so that it is entirely non-executive. A new Non-Executive Director, Clare Dobie, was also appointed. The company signed an Investment Management Agreement with Alliance Trust Investments to manage the portfolio for a fee of 0.35% of net assets under management, with a target of outperforming the MSCI All Country World Index in Sterling (MSCI ACWI) by at least 1% a year over a three year rolling period. The company simplified its structure and appointed independent directors to its subsidiaries, Alliance Trust Investments and Alliance Trust Savings. The company is now focused the portfolio on global equities and has reduced the number of non-core investments.

On 30 May, Alliance Trust announced that it had received an unsolicited approach from RIT Capital Partners PLC for a merger of the two companies. However, on 7 June, RIT Capital Partners withdrew its proposal. Alliance Trust say that they would consider any proposal as part of the Group strategic review that has already been initiated.

In terms of portfolio performance, The Trust says its quoted equity portfolio produced a return of 9.5% for the period against the benchmark’s 12.0% return and that much of the under-performance over the period came during June as the portfolio was impacted by the dislocation of markets resulting from the EU Referendum. The managers say that the Trust’s best performers came from companies associated with cloud computing. Specifically Equinix, a provider of internet related services, is a key beneficiary of the acceleration of cloud computing adoption across the enterprise technology landscape. The managers say that its co-location datacentres have become a key hub in the infrastructure of cloud technology. Accenture has also performed well. The managers say that it benefits from the need for large corporations to integrate the benefits of cloud computing into its technology infrastructure.

The financial sector was a source of underperformance for the Trust as two core holdings – Prudential and Legal & General – performed poorly over the period. The managers say that both companies have been hit by fears around the implications of the EU Referendum, particularly the risk that higher interest rates and bond yields in the UK are now many years away. The fund is overweight the UK versus the MSCI ACWI (16.7% compared to 6.4%), which the managers say also pressured performance over June and in the first six months of the year.

Across the materials, telecoms and utilities sectors, the managers say that the growth bias of the Trust’s process was a headwind during the first half of the year. With bond yields currently reaching fresh lows and Chinese authorities pumping large amounts of credit into their economy, the managers think that the market rewarded companies with the lowest valuations, rather than those with the strongest growth and fundamental tailwinds.

In terms of the Trust’s non-core Investments, the managers say that during the period they concluded that, given the prevailing weakness in oil and gas prices, it was not an appropriate time to complete the sale of the Trust’s mineral rights assets. They say that the Trust will continue to benefit from the revenue generated by these assets and the possibility of a sale will be reassessed when energy prices are more favourable. The Trust’s private equity investments have increased in value since the year end and provided a small positive contribution to investment returns over the first half of 2016.

In terms of outlook, the managers say that the second half of 2016 appears unclear after the EU Referendum vote. In their view, the UK economy appears set for at least a mild recession as investment and consumption freeze up in the midst of so much uncertainty. The question remains as to whether this will spill over into Europe and result in a slowdown across the global economy. They say that the unprecedented nature of the current situation makes forecasting the impact particularly challenging. Furthermore, they comment that political risks abound; from the US presidential election in November to other important elections and referendums in China, Germany, France and Italy over the next 18 months. With global economic growth already fragile, they think that political uncertainty is sure to be a headwind for equity markets.

Alliance Trust underperformance reflects turbulent market conditions around the EU referendum : ATST

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