Alliance Trust and F&C Investment Trust are two of the largest investment trusts offering investors access to a global portfolio of shares. Both are well over 100 years old, with a good track record of adapting to changing circumstances. There has always been something of a rivalry between them, but it feels to me as though one – Alliance Trust – is now pulling ahead.
In market cap terms, F&C (£5.0bn) ranks second in the investment companies sector behind Scottish Mortgage (£11.1bn). Polar Capital Technology Trust (£3.6bn) now occupies the number three slot, and Alliance Trust (£3.4bn) ranks fourth.
These trusts would be a lot bigger, but they are all buying back shares in an effort to manage their discounts and provide liquidity to investors. Alliance Trust has been the most successful in this regard and now trades on a 4.8% discount. That compares to 10.5% for F&C, 10.7% for Polar Capital Technology and a whopping 14.9% for Scottish Mortgage.
You do not get to be big without offering decent returns and, as we know, in recent times it has been the technology sector that has been driving markets. The Polar fund is solely focused on technology and its 10-year numbers reflect that. On average, it has made investors 20.0% per year for the last 10 years.
Scottish Mortgage’s phenomenal run of returns may have ended a couple of years ago, when interest rates started to rise. However, its 10-year figures are still impressive, averaging out at 15.0% per year.
Returns on the two more broadly-based funds are lower, but much less volatile.
A decade ago, Alliance Trust seemed to have lost its way a bit. The trust had exposure to many different asset classes, its own savings and asset management businesses, and returns on its equity portfolio did not look great. In 2016, the board announced a strategic review and in April 2017 adopted a new investment approach. Willis Towers Watson became the trust’s manager, the business was streamlined, and the board became much more aggressive about tackling the discount. Around £1bn worth of shares have been bought back since then.
The investment approach is described in the many notes that we have written on the trust, the latest of which is available here. However, in summary, the portfolio is now comprised of the best ideas of a clutch of managers selected by Willis Towers Watson. Great care is taken that the portfolio is not too skewed by investment style or asset allocation. The idea is that stock selection alone should be driving returns.
As we discussed in the news piece that we published on the morning of Alliance Trust’s recent results, this year’s stock selection outcome was impressive. It cannot be stressed enough how difficult it was for an actively managed portfolio to outperform the global equity index last year. A narrow group of stocks – the magnificent seven mega cap stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – dominated the index. If you did not have a full weighting in these seven companies, it was very hard to match the index.
F&C’s results – which we discussed here – drew attention to this. Its NAV return lagged the MSCI All Countries World Index by four percentage points in 2023 and the chair puts the trust’s underweight exposure to these stocks front and centre when discussing why 2023 was such a poor year for the fund.
The chair’s commentary goes on to talk about the swings in the trust’s ‘value’ and ‘growth’ exposures during the year and the effect that this had on returns. Alliance Trust’s investment approach meant that it was not caught in the same way.
Both trusts are AIC Dividend Heroes, both having a track record of increasing their dividends each year for more than 50 years now. Perhaps as some compensation for the poor capital performance, F&C made much of its 8.9% hike in its dividend for the year, by contrast Alliance Trust raised its dividend by 5%. However, Alliance Trust starts from the position of offering investors a much higher dividend yield and, even after these moves, its dividend income looks far more attractive than F&C’s.
Even though Alliance Trust’s new investment strategy is only seven years old, the trust’s returns have already made up the underperformance earlier in the decade. Its 10-year returns have now pulled ahead of F&C’s (12.6% per annum on average to F&C’s 12.0%). It feels to me as though the gap will only get wider. If I had to choose between the two, Alliance Trust is the obvious favourite.