QD view – Multi-manager trusts – a safe haven in current choppy markets?

What a week it has been in UK politics and markets. As I write, the political manoeuvring in Westminster continues to dominate the headlines and, from what I can see, this tale clearly has some way to go and so it will be grabbing more than its fair share of airtime for a while yet, but what does this mean for the UK market and economy? Well, the FTSE 100 is up 1.26% today, almost touching 7,200. At a first glance, the market appears to have taken the news of Boris’s departure well, perhaps in the hope that a change of leadership now will give the Conservatives more of a chance of avoiding a repeat of the 1997 general election (where John Major’s government lost handsomely to Tony Blair’s ‘New Labour’ on the back of corruption and sleaze at the heart of government). Nonetheless, the turbulent politics of the current government are not the UK’s only problem.

UK headwinds suggest value in a global approach

THE OBR has said today that UK government debt is on an “unsustainable path” unless spending is tightened and taxes are raised – not exactly a recipe for an ongoing economic recovery. However, this is not the only headwind affecting the UK. The Bank of England now expects UK CPI inflation to hit 11% by the autumn (inflation is already running at a 40-year high) and so further sharp interest rate rises seem to be increasingly unavoidable, with a very real risk of recession, particularly if energy costs continue to soar. The UK is also burdened by an ageing population and our productivity continues to lag that seen in both the US and Europe as a whole. Add in current tensions with the EU over the Northern Ireland Protocol and what this might do to trade, along with our own volatile politics, which seems destined to last at least until the autumn, we have a fair bit to be concerned about. This is not to say that I am giving up on the UK as an investment destination – we have some world class companies (many of which are trading cheaply while we wait for foreign investors to return or private equity to snap up some bargains), decent government (most of the time), an investable jurisdiction (unless you’re a Russian oligarch trying to hide the proceeds of your ill-gotten gains, property rights are generally respected) and a strong culture of innovation. However, there are choppy seas ahead, which has prompted me to think globally and revisit the large multi-manager investment trusts that should be a safe haven for investors at the current time.

There are three of these: Alliance Trust, Witan and F&C Investment Trust and my starting point for this article is that they are all designed to offer a one-stop-shop for investing. They all have a significant degree of diversification that should allow nervous investors to sleep more easily at night, but how do they work? A multi-manager approach is designed to offer investors access to a broad range of investment strategies, many of which may not be available to the average retail investor. Individual pots are then allocated to the underlying managers who are experts in their particular investment area. There is an inherent danger of over-diversification, but all of the managers tend to run high conviction funds, which should help to ensure that the overall portfolio is not overdiversified and generates alpha, rather than just a market return.

Pillars of the investment trust world

All three of the main multi-manager trusts are long lived. F&C is the eldest of all the investment trusts at 154 years old, having been established in 1868, but Alliance Trust comes in a close second at 134 with Witan the relative baby of the group at a mere 113 years. These sorts of tenures suggest that, while they have had challenges along the way, some of which have been quite public, these funds have been able to reinvent themselves and remain relevant to investors. There are plenty of other funds that have fallen along the wayside.

Capital growth focused, but with consistent income

While they all focus predominantly on capital growth, they are all AIC dividend heroes and offer investors a yield. The yields are not particularly high, and they do vary, but all of these trust’s boards are keen to protect their individual dividend hero statuses, so they can all be relied upon for the consistency of their income generation. Alliance Trust has the highest record for the number of consecutive years that its dividend has been increased at 55 years (this is the longest record of all investment trusts – an honour that Alliance Trust shares with Bankers and City of London), followed by F&C with 51 years and Witan with 47 years. Alliance Trust’s and Witan’s yields are quite comparable at 2.6% and 2.8% respectively, while F&C’s is a bit lower at 1.6%.

Size is not an issue

All three are a good size as well and have decent liquidity in their shares. F&C is the biggest of the three by some margin with a market cap at close to £4.3bn, but Alliance trust places second with £2.8bn and Witan places third with just £1.5bn. As noted above, they’re all global trusts too (which is not a surprise when you consider their mandates) and are amongst the biggest in that sector. As an aside, Scottish Mortgage is the biggest trust overall within the global sector at £11.2bn, and while its performance has been incredible over the longer term, its explicit growth focus and investment style means that its performance is inherently more volatile than the multi-manager vehicles. Aside from Scottish Mortgage, the only other global trusts bigger than the three multi-manager trusts is Monks. Like Scottish Mortgage, it has a strong growth style and its recent results (click here to see our coverage of these), show the effects of the sell off in growth. Both Monks and Scottish Mortgage are great vehicles, but perhaps not for the faint hearted.

Discounted opportunities?

All three of the multi-manager trusts tend to trade at a discount to NAV. At the time of writing, Alliance Trust is trading at around a 6.0% discount, while F&C’s is almost into double digits at 9.4% and Witan’s is 9.7%. The tightness of Alliance Trust’s discount is a reflection of the board’s very clear discount control policy – Alliance Trust intends to repurchase shares when the discount is greater than 5% – this seems to be keeping this trust’s discount in check. In comparison, F&C does not have a firm discount target but will provide liquidity to the market. However, it seems that F&C’s board is comfortable with a higher discount than Alliance Trust’s (during the last five months, F&C’s discount has tended to oscillate around the 10% level – in a band of between 7.5% and 12.5%) and the discount is certainly wider than it used to be (previously it had been trading in the 5-10% range). Similarly, Witan is active in the market for its own shares, but its board also seems prepared to tolerate a higher discount and, like F&C, it has also been trading at wider discounts in recent months.

Alliance Trust – manager of managers approach in place for five years

Alliance Trust is externally managed. Its investment manager, Willis Towers Watson (WTW), has selected nine expert stock picking firms, with different styles, who each ignore the benchmark. They select their best ideas (around 20 stocks each) to make up a geographically diverse portfolio that is invested across a wide range of industries and sectors. Manager changes are not a frequent occurrence, but they do happen where WTW deem it appropriate. Similarly, the overall shape of the portfolio tends to reflect the sum of the stock selection decisions of the underlying managers, although WTW can shift the portfolio’s exposures by re-allocating money between managers as it sees fit. The manager of managers approach has been in place for just over five years now and, while there were initially some teething troubles, this approach is now well bedded in. During the last five years, Alliance Trust has made a 7.6% a year (on average) NAV total return for investors. In comparison, F&C has provided a little more at 8.8%, while Witan is the laggard, having provided 4.1%. Since the management has moved to WTW, there has been a strong emphasis on sustainability (this was a key reason why WTW were selected). The manager has more than 70 experts focusing exclusively on the risks of climate change and is a signatory to the Net Zero Asset Managers Initiative (as well as the Principles for Responsible Investment and the UK Stewardship Code). Last year, ATST set itself a target to transition the portfolio to net zero greenhouse gas emissions by 2050, reinforcing its commitment to investing responsibly.

F&C – exposure to some 450 underlying companies

Like Alliance Trust, F&C is externally managed although, while WTW then selects managers external to itself to various strategies, F&C’s lead manager, Paul Niven, allocates money between strategies that are predominantly managed within Columbia Threadneedle (F&C’s investment manager). This is something that it can achieve relatively quickly. For example, Paul tilted the portfolio back towards US growth stocks in the aftermath of the invasion of Ukraine as he felt that the effects of higher oil and commodity prices would drive up inflation and had increased the risk of a global recession. This flexibility doesn’t limit F&C’s diversification, however. The trust has exposure to a broad range of strategies and geographies that gives it exposure to some 450 underlying companies – around 90% of these are listed, with the balance of around 10% offering investors a significant allocation to private equity. This allocation is felt to help reduce risk and to dampen the volatility of F&C’s returns. Like Alliance Trust, F&C’s portfolio is not constructed with reference to a benchmark. It has also been improving its ESG credentials in recent years and also laid out its intention to have a net zero portfolio by 2050.

Witan – a mix of core and specialist managers

Witan is effectively self-managed. Of the three, it is the one trust that has a CEO and employs other staff directly, but most of its investment activities are then outsourced to third-party managers. Around 75% of its assets are invested with its core manager line-up – this comprises five global managers, which account for 65% of its assets, and one UK manager, which accounts for around 10%. The other 25% is invested in its specialist portfolio. This provides exposure to specialist asset classes and other opportunities including Emerging Markets, Climate Change, Private Equity and Life Sciences. Its specialist managers tend to invest in companies (or regions) with superior long-term growth prospects. It is believed that these might be underrepresented in the typical global portfolios due to the specialist knowledge needed to analyse and follow these investments. Witan’s underlying managers tend to have 20 and 60 holdings in their portfolios, which gives the overall exposure to around 270 companies. Witan will utilise ETFs and index futures, from time-to-time, to tweak its regional exposures. It will also use these to adjust its exposures without having to adjust the amount of cash allocated to the underlying strategies (its underlying managers are not permitted to use derivatives or employ borrowing, but they can hold cash if they think it is appropriate). Witan too has bulked up its ESG credentials. It has committed to only having sustainable investments by 2030 as well as having a net zero portfolio by 2050.

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