Private equity assets buoy F&C results

While Alliance Trust has struggled to differentiate itself from passive alternatives


F&C Investment Trust’s exposure to private equity holdings helped it weather the market storm in 2022; but, despite Interactive Investor’s Dzmitry Lipski calling it “active management at its best”, changes to the trust’s debt value were the main driver behind fuelling its sector-best returns.

F&C’s unlisted stocks collectively returned 3.6% across the 12 months ending 31 December 2022, and at 12.3% of the portfolio, they provided good protection against the underperformance of its listed holdings.

However, while total portfolio return was -7.9%, changes in the value of the trust’s debt having contributed 4.2% to net asset value (NAV) return. At year end, borrowing was £582m in aggregate, and though this was higher than at any point over the last decade, fund manager Paul Niven explained that the debt’s average interest rate of 2.4% was “exceptionally low”.

NAV return of -5.3% was enough to beat both the -7.7% posted by its benchmark, the FTSE All-World Index, and the trust’s entire peer group.

Chair Beatrice Hollond voiced her disappointment about the negative return, but highlighted the trust’s strong relative performance.

F&C saw net assets fall 10% across the year, to £4.65bn, leading to a loss of £491m compared to returns approaching £1bn in 2021.

With share price holding relatively firm at -0.9% across the 12 months, the trust’s discount tightened to 3%.

A 5.5% year-on-year increase in its income payments, to 13.5p per share, made 2022 the 52nd year in which the trust consecutively grew its dividend, placing it firmly in the top band the AIC’s dividend hero club.

Alliance Trust

An even more well-established member of this club is Alliance Trust, which has made 56 consecutive years of dividend payment growth, posting a 21% year-on-year increase in its annual results on 9 March.

An NAV total return of -7.1% meant Alliance pipped its benchmark, the MSCI ACWI, by one percentage point, with chairman Gregor Stewart calling it a resilient performance.

Alliance’s portfolio actually had a marginally less detractive influence on NAV than that of F&C’s, contributing -7.4%, but the change in fair debt value was a far less telling contributor than in the case of its peer, adding just 1.6%.

It may have been a resilient performance compared to the sector, as Stewart claimed, but the trust suffered capital losses totalling £359m against a gain of over £500m in 2021, and net assets fell by 15% to £2.9bn.

These factors meant the trust swung to a £243m loss in 2022, having made a £540m profit the year before.

The trust aims to deliver long-term growth in both capital and income, as does F&C, but since the adoption of the multi-manager approach in April 2017, after all costs, Alliance’s NAV total return has, by its own admission, performed only in line with the equivalent low-cost passive products.

The fact that it had outperformed the AIC Global Sector in that period indicates that there is a majority of investment companies in that sector that have not been able to best their low-cost alternatives.

However, the Alliance report added: “Given that market returns are no longer as concentrated as they have been in recent years, we are growing more confident that we will outperform the benchmark from here.

“It is a trite analogy, but we believe that a slow and steady pace wins the investment race, even if it lacks the excitement and bursts of speed associated with more adventurous strategies.”

Investec currently has a ‘buy’ recommendation for Alliance Trust, which it described as having a “unique and innovative multi-manager approach, featuring high conviction stock selection and genuine active management”.

“ATST gives investors a low-cost exposure to nine leading equity managers selected by Willis Towers Watson. The underlying managers run highly concentrated portfolios—typically 10-20 stocks—which reflect their best ideas. The managers have markedly different but complementary styles, and the resultant diversification mitigates risks. It’s now nearly six years since WTW assumed responsibility for Alliance; in this period, the NAV total return is marginally ahead of the benchmark in what has been a challenging environment for stock-pickers.

“Having put in place solid foundations, the challenge is to now build on these. Here, greater macro and policy uncertainties are likely to provide a more supportive environment for fundamentally driven stock-pickers, and we note there has been a strong uptick in the relative performance recently,” the Investec team added.


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