‘Burn and churn’ sees Alliance Trust offload a third of its portfolio

The first half of 2022 saw Alliance Trust take some fairly drastic action, with the removal of River & Mercantile from its stable of stock pickers and shedding of Russian holdings adding to the 32.7% turnover in its portfolio.

The multi-manager trust, which dates back to 1888, outsources the stock picking to nine investment groups, each selecting no more than 20 stocks. There are currently 185 holdings in the portfolio.

All of the stock pickers are selected by Willis Towers Watson, with March witnessing the removal of River & Mercantile from the roster. The company has not been replaced; with its remit, roughly equating to 6% of the portfolio, split between the remaining nine firms.

Further, Alliance Trust chairman Gregor Stewart (pictured) said, in addition to a limited number of exclusions it put in place in late 2021, it had added “a restriction preventing investment in Russia and Belarus”.

“The few Russian holdings that were held in the portfolio at the start of the year were all sold by 1 March 2022, before the market for those stocks closed,” he added.

The overall exposure to Russia was approximately 0.5%. At no point has the trust held Belarussian or Ukrainian companies.

These two events were the main drivers behind the 32.7% turnover. Under more usual circumstances, Alliance Trust aims for annual turnover of 10-15%.

See also: Assetco aims to get River and Mercantile profitable by early 2023

Going backwards on ESG?

The trust acknowledged that the last 12 months has seen the portfolio’s allocation to energy and materials increase, “which, in turn, increased its carbon footprint”.

“This seems at odds with what we are trying to achieve. However, our stock pickers are recognising that the valuations placed on these companies by the market appear too cheap, even after factoring in the financial material ESG risks posed by the energy transition.”

Recent changes have seen the addition of Petrobras and NRG Energy to the portfolio, which the company said “have contributed positively to performance”. Another carbon-heavy holding is HeidelbergCement. Collectively, the trio is responsible for 60% of the portfolio’s emissions.

“We favour engagement over exclusions, as simple decarbonisation through exclusion and divestment provide a limited way to manage risks and do not achieve the desired impact in terms of decarbonisation across the wider economy,” Alliance Trust added.

Dzmitry Lipski, head of fund research at Interactive Investor, said the results show some “churn and burn, [as] portfolio turnover was far higher than normal and a higher allocation to energy stocks compromised climate goals”.

“The environmental set back, for now at least, won’t make easy reading. But hands on, active management won’t always come with easy answers and the trust points to its engagement approach around climate goals. In this case, the trust’s active management helped it beat it’s benchmark by 0.5 percentage points.”

In the six months to 30 June, the trust returned -10.5% on an NAV basis, narrowly beating the MSCI AWI which delivered -11%. Shares were down 11.3% over the six months, with the discount widening to 6.3% from an average of 5.9% in the same period the year before.

While the above may not seem like much to write home about, Alliance Trust comfortably outperformed rival global investment trusts, which returned -18.6%, on average.

Lipski added: “At the start of year 2022, the trust was well positioned to outperform and indeed managed to do so in terms of NAV performance. The large cap position has supported the return of the trust. Value-oriented stock pickers of the trust outperformed over the six-month period ended 30 June 2022, while the performance of growth-oriented stock pickers lagged.

“Overweight in UK stocks, such as BAE Systems and Booz Allen Hamilton benefited the trust, so did underweight to consumer discretionary and overweight to energy. In contrast, overweight to communication services negatively impacted the performance.”

Lipski added: “An increase of first two interim dividends for 2022 to 12.0p, from 2021’s 7.40p, will be well received by investors.”

See also: ‘Magnificent seven’ trusts record 50 years of annual dividend hikes

According to the H1 2022 update, the top 10 holdings in the portfolio are as follows:

The removal of River & Mercantile from the stock picker team resulted in the following allocation changes: