Alliance Witan (ALW) has published its annual results for the year ended 31 December 2024, which it describes as a landmark year – 2024 saw the trust promoted to the FTSE 100 merger following the merger with Witan. ALW’s share price was £12.44 as of 31 December 2024, representing a share price total return of 14.3%, while its NAV total return for the year was 13.3%. While both the NAV and share price total returns are strongly positive, they trailed ALW’s benchmark, the MSCI All Country World Index (‘MSCI ACWI’), which returned 19.6%. ALW’s average discount narrowed to 4.7% from 5.4% at the end of 2023, which compared favourably with the average discount for the Association of Investment Company’s Global Sector of 7.9%. ALW also marginally underperformed its peers in the AIC Global Sector, but was slightly ahead of the much wider Morningstar peer group of open and closed-ended global equity funds.
ALW says that its relative performance in 2024 suffered from not having enough exposure to the small number of very large companies that dominated market returns, especially in the US, adding that the narrowness of returns from global equity markets has been a common problem for all active managers in recent years. ALW says that it takes comfort from the fact that, despite this persistent headwind, its performance is ahead of the Index and it has significantly outperformed both peer groups over three years.
A fourth interim dividend 6.73p per share was declared on 28 January 2025, bringing the total dividend for the year ended 31 December 2024 to 26.70p per share. This is a 6% increase on the previous year and the 58th consecutive annual increase.
Discount management
ALW comments that any investment trusts continued to trade on large discounts to NAV throughout 2024, with the industry average widening to 14.7% from 12.7%. In this regard, ALW fared better than most, with its average discount falling to 4.7% from 5.4% over the year. ALW’s discount is tighter than the average discount for the AIC Global Sector of 7.9%.
ALW’s board says that it remains committed to the maintenance of a stable discount and that it will continue to use share buybacks as appropriate and invest in promotional activity to widen the shareholder base and support the discount.
During 2024, ALW bought back 4.7 million shares (1.2% of shares in issue), versus 8.6 million repurchased in 2023. The shares bought back during the year were placed in treasury. ALW comments that this level of buybacks was significantly below that its peers, in a year in which industry-wide buybacks hit a record level of £7.5bn.
Investment manager’s review
Market backdrop: equities untroubled by politics
For the second year running, global equities delivered strong returns in 2024, with economics trumping politics. Despite a record number of elections, conflicts in the Middle East and Ukraine reaching new heights, and a scary moment in Japan when the Nikkei Index of the top 225 blue-chip shares plunged 12% in a day at the beginning of August, investors focused on resilient global growth, falling inflation and interest rates, and healthy corporate profitability.
Hence, our benchmark index, the MSCI ACWI, returned 19.6% in 2024 following a return of 15.3% in 2023. Since 1987, the Index has returned an average of 8.4% per annum1, so returns of this magnitude in two consecutive years are rare. The ebullient mood of equity investors was reflected in a surge in the prices of less established assets, such as cryptocurrency, with Bitcoin reaching all-time highs of over $100,000. Peanut the Squirrel Coin, a cryptocurrency named after the eponymous pet that New York environmental authorities seized and euthanised on 30 October 2024, at one point commanded a market cap of $1.7 billion.
However, regional equity market performance was mixed. US markets once again led the way, with the S&P 500 delivering a 27% return when measured in British pounds. Chinese equities rallied briefly following government stimulus, but concerns over the country’s property market and trade tensions persisted. Together with a strong US dollar, these worries led to more subdued returns from emerging markets, which rose about 9%. In Japan, August’s technically driven decline proved temporary, and the Nikkei resumed its ascent to close the year at a record high, although the yen’s depreciation reduced returns for UK-based investors when converted into British pounds. The UK and European markets were more muted, with the FTSE All Share Index and the MSCI Europe ex UK Index returning 9.5% and 1.9% respectively.
Gains driven by US tech giants
Giant US technology related stocks were the standout performers, fuelled by investor excitement about generative artificial intelligence (‘AI’) and, from November onwards, hopes that Donald Trump’s victory in the presidential election would weaken regulatory scrutiny. The share prices of the so called “Magnificent Seven” – Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA and Tesla – increased by 60% on average and were responsible for 43% of MSCI ACWI’s gains. This was less than 2023 when they contributed 53%, but still a huge number emphasising the extreme concentration of index returns in a small number of companies.
Even so, from mid-year onwards, returns were no longer quite as skewed to the performance of a handful of shares. Although NVIDIA and Tesla returned a massive 176% and 65% respectively, giant tech was not the only game in town. Financial stocks returned 26.5%, and returns from the consumer discretionary, industrial and utility sectors were also well into double figures, pointing to the potential broadening out of market returns as stock-specific drivers came to the fore.
Portfolio performance: strong absolute gains but lagged benchmark index
Our portfolio’s NAV Total Return was a robust 13.3% but, as with most active managers, it lagged the Company’s benchmark index. The portfolio does, however, remain ahead of the Index over three years (28.0% vs 26.8%), albeit behind over five years (64.7% vs 70.8%). Disappointing though it was not to beat the MSCI ACWI in 2024, we were not alone. AJ Bell calculated that, to the end of November, just 18% of active global equity funds outperformed their passive peers, largely due to their inability to match high Index weightings in the “Magnificent Seven”. The sheer size of these companies in the Index is mind boggling. NVIDIA, Microsoft and Apple, for example, represent 13% of the MSCI ACWI as at 31 December 2024 and, together, are bigger than the entire stock markets of several sizeable countries.
The skew of the Index towards mega-cap companies has been a challenge, to varying degrees, since the start of our multi-manager strategy in April 2017. As a broadly diversified strategy, with capital spread between 8-12 Managers, all with different approaches to investing, our portfolio naturally has a structural bias away from stocks that on rare occasions represent such a large proportion of our global benchmark. While we have some exposure to most of the “Magnificent Seven”, it would require a lot of the Managers to choose them as one of their best ideas for us to be at Index weight, never mind be overweight.
The Index may have been hard to beat in recent years, but market concentration poses significant risks for passive strategies. At the end of 2024, the Index on average allocated around 150 times as much capital to each of Apple, NVIDIA and Microsoft as it did to the average stock, akin to us placing about 95% of the portfolio in one manager’s hands and 0.5% each in the other ten.
We do not believe this is the right way to manage risk for shareholders, bearing in mind that index trackers are not investing lots of money in these companies because they are good businesses trading at good valuations, but because they are very big. If US large-cap stocks continue to dominate, tracker funds may continue to outperform active funds. But if sentiment on the technology sector turns sour, passive funds with big stakes will be hit much harder.
Not owning enough NVIDIA was painful
The strong outperformance of our portfolio versus our benchmark in 2023 continued into the first quarter of 2024, when the biggest contribution came from not owning, at that time, poorly performing Tesla and Apple. But thereafter stock selection became more challenging, particularly within the “Magnificent Seven”. Although we benefitted from owning Amazon and Microsoft, we moved from an overweight to an underweight position in NVIDIA in the first quarter after its extraordinary outperformance, which then made it our biggest single detractor last year as that outperformance continued. Having helped us in the first quarter, the lack of exposure to Tesla and Apple, which both recovered strongly as the year progressed, counted against us from then on. Overall, our positions in the “Magnificent Seven” accounted for a third of the portfolio’s underperformance versus the Index in 2024.
The remainder of the portfolio’s underperformance came from a combination of being underweight in large-cap stocks in general and stock specific issues elsewhere, in some cases due to partial reversals of performance in 2023. For example, stock selection in financials detracted in large part due to our relative lack of exposure to strongly performing US banks such as JP Morgan and Goldman Sachs. In the consumer discretionary sector, the share price of UK-based drinks company Diageo, owned by Veritas Asset Management (‘Veritas’) and Metropolis Capital (‘Metropolis’), continued to suffer from a post-Covid cyclical downturn, falling 8.5%, although both Managers believe the company will eventually recover lost ground when structural trends reassert themselves. Novo Nordisk, the Danish weight loss drugs company, was another notable detractor, as its shares fell 14% after disappointing test results. Our Stock Pickers see this as a temporary decline in a growing market in which Novo Nordisk has a leading position. Hence, it was one of our biggest purchases in 2024 (see table below).
Indeed, our Stock Pickers express a high degree of confidence in the latent value of many of their holdings. By far the most important long run ingredient underpinning share price performance is strong fundamentals, such as market-leading products or services, solid profit margins, plentiful cashflow and strong management.
The purchases and sales are calculated by taking the net value of all transactions (buy and sells) for each holding held within the portfolio over the period. The tables exclude any non-equity holdings such as ETFs and any transfers from the combination with Witan.
Even so, in the short run, market sentiment can have a larger impact on share prices than fundamentals. When we break down the portfolio performance against the Index into fundamentals and sentiment, the portfolio’s strong absolute performance has been mainly as a result of company fundamentals, whereas the Index’s absolute performance has been more driven by market sentiment.
A full breakdown of the contributors to our Total Return in 2024 is shown in the following table.
In the table below, we also list the top five contributors and detractors to portfolio performance during the year relative to the portfolio’s benchmark.
Sands, Vulcan and Lyrical were the top performers
As we would expect from such a diverse line up, performance among our Managers was mixed. This is by design, as we do not want the portfolio to be biased towards any one approach of investing, which might make returns vulnerable to a sudden switch from one style to another. This happened in 2022 when growth stocks began to suffer significantly as central banks raised interest rates to combat inflation. Sands Capital (‘Sands’), Vulcan Value Partners (‘Vulcan’), and Lyrical Asset Management (‘Lyrical’) were the top performers last year. Sands and Vulcan both benefitted from owning tech giants. Sands held NVIDIA while Vulcan held Amazon, but Sands’ largest contributor to relative performance was Axon Enterprise, an industrial business which makes tasers, body cameras and other software products. Its share price surged by 134% last year.
The tables above illustrate the top five contributors and detractors to returns relative to benchmark in 2024. It aims to explain at a stock level which companies drove relative returns. For example, the Alliance Witan portfolio was underweight relative to benchmark in NVIDIA, Broadcom, Tesla and Apple. These stocks had very strong returns, which hurt our portfolio’s relative performance. Conversely, not having an exposure to Nestle helped our relative performance given the stock was held in the benchmark and was down over the year. Our overweight position in Amazon, Axon Enterprise, Salesforce and NRG Energy contributed positively to relative returns given their strong performance. The average active weight is the arithmetic simple average weight of the stock in the portfolio minus the arithmetic simple average weight of the stock in the benchmark over the period.
Vulcan’s largest contributor to our performance was KKR, the US-based private equity group, which returned 82%, prompting Vulcan to take profits. Its holding in Salesforce also did well, rising nearly 30%.
Lyrical, a deep-value style investor, benefitted from owning several less talked-about US-based companies, which all rebounded from cheap valuations. These included NRG Energy, Ameriprise Financials and eBay.
Of our Managers, the most notable laggard was Sustainable Growth Advisors (‘SGA’), which was disappointing given its focus on large cap growth stocks which, as a group, had the strongest price momentum. SGA suffered from holding Novo Nordisk, and two of its other positions, ICON and Synopsys also stood out as detractors. The recent poor performance of SGA follows a long period of outperformance, so returns since we appointed SGA remain strong. Value Managers Metropolis and ARGA Investment Management (‘ARGA’), the latter replacing Jupiter Asset Management (‘Jupiter’) in April, also struggled in the recent market environment, which has generally favoured growth managers.
Portfolio changes: two new Managers added after combination with Witan
As well as adding ARGA for Jupiter in the first half of the year, following Ben Whitmore’s decision to leave Jupiter to set up his own business, there were two further changes to the Manager line-up during the integration of Witan’s portfolio. Altogether, this contributed to an unusually high level of turnover of 98.5% of the portfolio in 2024. Both Alliance Trust and Witan already had GQG Partners (‘GQG’) and Veritas in common, which meant that there were some in-specie transfers of stocks. Additionally, the combination of Alliance and Witan presented us with an opportunity to introduce Jennison Associates (‘Jennison’) to the portfolio at a low cost.
Based in the US, Jennison specialises in investing in innovative, fast-growing businesses. It had been one of Witan’s most successful managers and blending it with our other Managers increased the diversity of holdings in growth companies. We also took the opportunity to replace Black Creek Investment Management (‘Black Creek’) with EdgePoint Investment Group (‘EdgePoint’), while we were using a transition manager to keep costs down to a minimum.
This change was prompted by succession planning at Black Creek. We had been monitoring Black Creek for some time due to the departure of a senior team member for health reasons and the uncertainty surrounding the timing of founder Bill Kanko’s retirement. With a similar investment style to Black Creek, EdgePoint seeks to buy good, undervalued businesses and hold them until the market fully realises their potential.
Through the combination, we inherited a small number of investment trust and private equity fund holdings, representing less than 3% of the combined portfolio. These are specialist funds with portfolios focused on, among other things, early-stage life sciences, valuable intellectual property, innovative internet platforms and renewable infrastructure assets. Collective investments such as these are not normally part of our investment strategy. However, they are all trading at prices we believe are well below their intrinsic value, so rather than sell them at a loss, we will hold them until we can achieve attractive values.
Beyond that, the combination did not lead to any change in our investment approach. We retain high conviction in our line-up of Managers and their ability to pick winning stocks, although we keep them under constant review for any red flags and have access to a deep bench of talented replacements should these be needed.
Gearing: remaining cautious
Our gross gearing stood at 8.4% at the end of 2024 (4.9% net of underlying Manager and central cash), slightly above the level of 7.1% at the start of the year, reflecting the improving outlook for equities as the year progressed. However, given the strong performance from equity markets, it is still towards the lower end of the typical range of 7.5 to 12.5%.
Market outlook: multiple risks warrant diversification
As 2025 began, the mood among investors was upbeat, with many hoping President Trump’s promises of deregulation and tax cuts would be supportive of equity markets. If returns can spread beyond a narrow group of highly valued US mega-cap technology stocks, it could provide firmer foundations for another good year for shares. The strong start to the year for European equities certainly offered hope for geographical diversification.
However, on-off tariffs and geopolitical tensions loom large, creating considerable uncertainty. This was reflected in an increase in equity market volatility in February.
In the first 2 months of 2025, the benchmark index rose by 2.2% suggesting that investors were still willing to look through some of the risks while forecast global growth and corporate earnings remain healthy. But confidence is fragile and, with valuations in the US still close to a record high despite February’s pullback, the market is vulnerable to setbacks.
In this environment, we believe bottom-up stock picking, based on company fundamentals, should be a more reliable way to add value for shareholders in the long term than making bold, top-down market calls. So, we will continue to position the portfolio to maintain balanced regional, sector and style exposures, that are similar to the Index weightings by periodically adjusting Manager allocations. This should provide stability and reduce risk, while we rely on our Managers to add value by seeking out the best companies in each market segment.
While retaining some exposure to US mega-cap tech stocks that may continue delivering attractive returns, our portfolio is not reliant on them. It also contains many stocks that have remained in the shadows but have been performing well operationally and have excellent prospects not yet reflected in their share prices.
Hidden gems: stock picks with high potential
We asked our eleven Stock Pickers for examples of strong but underappreciated companies in the portfolio
Lyrical highlighted five of its US holdings that have underperformed the S&P 500 Index since the start of 2024 but, at the same time, have grown their forecast earnings per share by more than the Index. These are healthcare providers Cigna and HCA, WEX and Global Payments, which both provide business-to-business payment technology, and Gen Digital, which is a leading provider of cyber security and identity protection.
Interestingly, even on this list there is inconsistency by the market,” says Lyrical. “Cigna has the worst stock performance, but the second-best earnings per share (‘EPS’) growth. Gen Digital has the slowest EPS growth in the group, but the best performance.
ARGA cited Accor, the global hotel business, which has transitioned to an “asset light” business model by selling most of its hotels, while maintaining the lucrative franchise and management agreements attached to these properties. While Sands Capital sees potential in the share prices of Sika, a maintenance and building refurbishment specialist.
Investment results have been weak despite solid fundamental results,” says Sands. “We believe that investors have focused on slower than historical organic growth, caused by several factors, including the real estate crisis in China, slowdown in electric vehicle production, and a pause in green building incentives.
Sands Capital also mentioned Roper Technologies, a diversified industrial technology company, and Keyence, a leading designer of high-end factory automation based in Japan, as attractive businesses with share price appreciation potential.
Vulcan highlighted CoStar Group, an information provider to the commercial and residential real estate industries, and Everest Group, a global insurance and reinsurance business, while GQG mentioned the UK-based pharmaceutical company AstraZeneca, the Brazil-based oil and gas company Petrobras, Bank Mandiri in Indonesia, and the Indian tobacco company ITC.
SGA backed Danaher, the US industrial group, Intuit, which provides do-it-yourself accounting software for small businesses, and HDFC Bank in India. Jennison highlighted Reddit, the online social media platform.
Reddit is targeting 49% growth in the third quarter of 2024 and consensus is at 41% in Q4, but then market estimates are fading down to around 20% in 2025, which we think is overly conservative and creates an opportunity for investment today.
Veritas’s nominations for underappreciated businesses were Amadeus, the Spanish software company focusing on air travel, The Cooper Companies, which makes contact lenses, and Thermo Fisher Scientific, the world’s largest scientific equipment provider.
Japan specialist Dalton’s best stocks included Bandai Namco, a multinational that publishes video games and makes toys, Shimano, the bicycle equipment manufacturer, and Rinnai, one of the global leaders in water heaters. Metropolis highlighted Andritz, the Austrian headquartered business supplying industrial equipment to the pulp and paper, metals and hydropower industries, Crown Holdings, which makes aluminium drinks cans, and Admiral, the UK insurer.
Finally, EdgePoint, the newest addition to our Manager line-up, pointed to Dayforce, a global human resources software company, Nippon Paints Holdings in Japan, Franco-Nevada, a gold-focused royalty company in Canada, and Qualcomm, which invented significant pieces of the underlying technology required for mobile phones.
The market looks at Qualcomm as a handset supplier and the stock moves in relation to expected handset sales over the following quarters,” says EdgePoint. “We consider Qualcomm to be one of the world’s leading designers of energy-efficient processors at a point in time when demand for energy-efficient processing is growing rapidly across a wide range of industries. Some of the major opportunities for Qualcomm over the next 5 years include artificial intelligence, automobiles, personal computers and smartphones.
Altogether, these fundamentally strong businesses combine with others to create a robust, multi-manager portfolio that offers attractive long-term growth with lower risk than a single manager strategy, and therefore a more comfortable ride through the ups and downs of the market. Such companies may have remained below the radar in 2024, when investors became giddy with the stellar returns from the US technology shares, but we look forward to their attributes receiving the recognition from the market that they deserve.
