Alliance Trust boasted outperformance in its latest annual report released yesterday, but it beat global markets without relying on the Magnificent Seven.
The £3.4bn trust delivered a total return of 20.2% in 2023, outpacing both the IT Global sector (which was up 14.8%) and MSCI ACWI benchmark (15.3%).
Magnificent Seven stocks such as Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla drove global markets last year, accounting for 57% of the benchmark index’s total return, but they only contributed to 34% of Alliance Trust’s performance in 2023.
Indeed, none of the portfolio’s 10 management teams allocated to Apple or Tesla at all. Willis Towers Watson global chief investment officer Craig Baker said that this is “not a call on Apple or Tesla looking bad, it’s just that they can find better opportunities outside of the Magnificent Seven”.
This is because greater value is now being put on the underlying fundamentals of companies, rather than their speculative growth potential – a significant shift from how markets have typically priced stocks over the past decade.
Baker said: “Whilst the market was very much driven in absolute terms by those seven stocks, we did see that fundamentals were driving markets outside of the Magnificent Seven.
“In previous periods over the last few years, performance has been concentrated in a small number of stocks. In those periods you saw all stocks doing well or all stocks doing badly regardless of earnings progression, whereas we’re now seeing fundamentals driving stocks.”
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The increasing importance placed on fundamentals has largely been caused by greater volatility in recent years. For much of the past decade, stable market conditions were supportive of growth companies and lifted many of their share prices collectively.
Now that unpredictable macro and geopolitics movements have created more hurdles for businesses to tackle, investors could become more attracted to companies with robust fundamentals that will help them weather these challenges, according to Baker.
He said: “Our managers are not particularly skilled at calling the macro environment – in fact, most people aren’t. They tend to invest in companies that they think will do well regardless of what the economic environment is.
“We’re pretty confident that stock selection will come to the fore after many years of free money, where interest rates were set at zero. Lots of companies can do well in such an environment, whereas in this current market dynamic, you’re going to see companies that genuinely deserve to have a premium rating have that reflected in the share price. Hopefully that will allow long-term stock pickers like to produce some strong returns.”
Alliance Trust’s ability to outperform the market with an underweight to the Magnificent Seven could be an indicator that this shift towards fundamentals is already underway.
Of the trust’s 10 managers, the best performance came from C.T Fitzpatrick, who runs 6% of the portfolio on behalf of Vulcan Value Partners. While he did have some exposure to Amazon and Microsoft, much of his outperformance came from General Electric and KKR, which were up 91.4% and 71.9% respectively over the past year.
Baker pointed out that neither of these companies received as much attention as the Magnificent Seven despite delivering strong returns in 2023. Investors could therefore benefit from widening their scope and seeking fundamentally stable stocks outside this small handful of companies.
