Alliance Trust had a good year in 2023, returning 21.6% in NAV terms and 20.2% in share price terms, 6.3 and 4.9 percentage points ahead of the return on the MSCI All Country World Index (MSCI ACWI), respectively.
A 5% increase in the annual dividend to 25.2p per share makes this the 57th year of consecutive dividend inceases for the trust.
The chair notes that “In a highly concentrated market, it was reassuring to note that the driver of the company’s outperformance in 2023, was the broadly-based, skilled stock picking approach, rather than the result of any significant style, country, or sector biases.” [Quite frankly, beating a global index, and beating it by a decent margin, in a period where returns were dominated by the ‘magnificent seven’ AI-related stocks was a real achievement and deserves to be congratulated.]
The chair’s statement notes that the trust’s returns also compared favourably with the average returns of our two peer groups, 16.3% for the Association of Investment Companies (‘AIC’) Global Sector investment trust peer group and 12.7% for the Morningstar universe of UK retail global equity funds (open-ended and closed-ended). The trust is designed not to have significant style, country, or sector biases within the portfolio. Therefore, the outperformance was all down to good stockpicking.
The slight widening of the discount (to 5.2% at the year end) seems at odds with the strong NAV returns and came despite the company buying back 8.6m shares (2.9% of shares in issue as at 31 December 2022). These share buybacks enhanced the NAV total return by 0.2%. The discount is currently 4.6%.
Extracts from the manager’s report
Most of our stock pickers outperformed the MSCI ACWI, with the outperformers having a variety of investment styles and exposures. Vulcan Value Partners (‘Vulcan’), which buys high quality stocks when their share prices drop below estimated long term value, was the biggest contributor to the portfolio’s outperformance. Vulcan’s concentrated selection of stocks rose collectively by almost 50%. Its most successful holdings included two of the “Magnificent Seven”, Microsoft and Amazon, but Vulcan’s top five contributors also included the industrial conglomerate General Electric and the private equity group KKR, whose share prices rose by 85% and 70% respectively.
Veritas and Sustainable Growth Advisors (’SGA’), both of which focus on high quality growth stocks, were close behind Vulcan, along with growth-style specialist Sands Capital (’Sands’), and Metropolis Capital (‘Metropolis’), which has a value-based investment philosophy. Veritas and SGA both benefitted from owning Amazon and Alphabet, but, as with Vulcan, not all their top contributors were US tech-related businesses. Veritas’ largest contributors to portfolio outperformance included Safran, the French aerospace and defence company, and Aena, the Spanish industrial group; SGA’s contribution was topped by MercardoLibre, Latin America’s answer to eBay. Sands was actually the strongest performer of all the managers in absolute terms but its low weight in the portfolio, means that it did not contribute as much to the portfolio’s outperformance as the others. Sands’ biggest individual contributor was the US software company ServiceNow and Metropolis’ was Alphabet.
At the other end of the spectrum, the holdings in aggregate of Black Creek Investment Management (’Black Creek’) and Jupiter failed to keep up with the market, but both picked some notable individual winners, as did GQG Partners (‘GQG’) whose overall return was market-like in 2023. For example, Black Creek’s investment in Ebara, the Japanese industrial equipment manufacturer, returned 60% and was among the biggest individual contributors to portfolio performance. Jupiter’s holdings in Kyndryl, the US technology infrastructure business spun out of IBM in 2021, posted a gain of 76% and GQG’s investment in Petrobras, the Brazilian state-owned oil and natural gas major, delivered a return of almost 80%.
Looking at the portfolio as a whole, it is clear that selective exposure to the “Magnificent Seven” stocks was a significant driver of portfolio returns last year. But it is important to point out that we had no exposure to Tesla, had a relatively low weight in Apple and a below benchmark weight in Nvidia early in the year when the stock soared, which detracted from relative performance. This demonstrates a selective approach to the “Magnificent Seven” by our stock pickers based on their assessment of business fundamentals, as opposed to treating them as a homogenous entity. Such was the rally among the “Magnificent Seven” that they accounted for approximately 30% of the S&P 500 at year end, or the same as the market capitalisation of Japan, Canada and the UK combined1. This represents enormous concentration risk in the benchmark which we are keen to mitigate, via active management.
Unlike the index, our returns were not reliant on a cluster of dominant players. Indeed, in aggregate, a greater proportion of our gains came from relatively small incremental contributions from diversified exposure to a wide variety of stocks in different industries. You can see from the pie charts on page 10 of the Annual Report that 53% of the benchmark’s return came from the “Magnificent Seven”. However, they accounted for only 34% of the portfolio’s return.
Our stock pickers are not complacent about the ability of “big tech” companies to continue to dominate the market, hence continued exposure to Amazon, Microsoft, and Alphabet, which are all in the portfolio’s top ten positions. However, our stock pickers remain wary of AI hype. As with the internet bubble 20 years ago and other innovative technologies like cloud computing, it could take several years before the clear winners of AI emerge, and they will not necessarily be the early front runners. So, while the portfolio does have exposure to AI, through Microsoft and a small position in Nvidia, for example, our stock pickers seek to profit from AI on a company-by-company basis, rather than treating AI as a broad theme. Having been through a euphoric period in which it was obligatory for every tech company to develop an AI strategy, it is now approaching the time when investors are likely to begin demanding real revenue and profits from the technology. Active management of exposures to AI, including within mega caps, will therefore be key.
ATST : Alliance Trust celebrates decent outperformance in 2023