Should you purchase into the Alliance Witan mega funding belief? The INVESTMENT ANALYST verdict

Investment trusts offer a world of opportunities to tap into but how can investors sort the wheat from the chaff? In our new Investment Analyst column, experts run the rule over whats on offer.

In this column, Thomas McMahon, Head of Investment Companies Research, at Kepler Partners, looks at the newly merged Alliance Witan mega investment trust.

British savers have been relentlessly pumping their money into cash accounts, according to Bank of England data.

Some £17.2bn more was put in cash Isas in the year to August 2024 compared to a year earlier, a rise of 51 per cent.

At best, savers would have made around 5 per cent on this cash (if it had been invested over the whole period).

But the much-maligned FTSE 100 was up 16.5 per cent over the same period, while the MSCI ACWI (which includes equities from around the developed and emerging markets) was up 18.3 per cent. That’s a lot of money missed out on by those who chose cash over equities.

Let’s acknowledge that cash savings are often appropriate, but even so, the UK has a major problem with investors preferring cash over investments that can earn them more over the long run.

This is shown by the much higher percentage of American households which have investments in stocks and shares – around 60 per cent versus 20 per cent in this country.

To spell out the effect of underinvestment, if you receive 7 per cent a year on your investment (a reasonable estimate of long-run stock market returns) you will almost double your money over a decade.

Whereas if you earn 3 per cent a year (a perhaps generous estimate of an average long-term cash savings rate), you will have grown your wealth by just a third.

When you consider inflation, in the second case you may not even be much better off than you were before.

The mega-trust that invests around the world

When polled on why they don’t invest, Brits tend to highlight the confusing number of options, the inability to compare these options and concerns about risk.

I think all these issues are well-addressed by Alliance Witan, the £5bn combined trust resulting from the merger of Alliance Trust and Witan.

Arguably everything about Alliance Witan makes it a great option to consider for a retail investor looking to get into the equity market for the first time, or one wanting to add to existing holdings and frankly bewildered by the masses of information and risk warnings out there.

Alliance Trust traces its history back to 1888, while Witan was launched in 1909. Both became firm retail favourites over the years.

In 2017, Alliance Trust took on a new manager with an approach that is pretty radical in the retail space, but tested and proven in funds run for professional or institutional investors by Willis Towers Watson, the international consulting giant now managing the trust.

Its success since then meant that when Witan’s former manager retired, the board of directors decided the best option was to merge and allow its shareholders to benefit from the same approach.

The product of a merger is an investment trust that is currently large enough to qualify for the FTSE 100, which is in itself a major selling point.

Such a large company is investable for a very broad set of investors, including large wealth managers and institutional investors, and this should mean that liquidity for those buying and selling shares should be better, reducing trading costs.

A larger asset base will also mean lower charges for investors as a percentage of their holdings, and given the importance of low fees to long-term returns, this is an appealing feature of the new trust in itself.

How Alliance Witan invests

Incidentally, the Witan was an Anglo-Saxon convention of the nobles of England which is seen as a precursor of our Parliament. It had the ability to choose the king in times of crisis, which is either a neat metaphor for what has just happened or a cheesy and irrelevant rhetorical device.

Pushing the metaphor to breaking point, Alliance Trust’s managers’ main claim to the throne was its sophisticated but ultimately simple investment strategy.

The idea is to hire the best stock pickers in the world, selecting managers covering a range of end markets, and ask them to pick their very best ideas. Alliance Witan’s managers, Craig Baker, Stuart Gray and Mark Davis, allocate money between the different managers.

The critical point is that Craig, Stuart and Mark aim to make sure the overall portfolio has similar exposures to the key risks in the global equity market.

So, for example, while some of the stock pickers might allocate to high growth tech stocks, the team make sure that this is offset by cheaper companies that fit with a traditional value investment approach of looking for undervalued shares.

While a lot of managers will set out to balance investments with different risks, Alliance Witan’s are strict about ensuring that on many key areas of risk, they are as close as possible to the index and not falling into the trap of letting their personal views determine how the portfolio is positioned.

A good alternative to a global tracker fund

The ultimate aim is to ensure that it is individual stock selection that determines how well the trust does versus a passive investment in the index, rather than big calls on which country is going to do better, or what is going to happen in the economy over the next year.

There are good reasons for taking this approach: academic research suggests that good managers can add value by identifying the right companies, but forecasting what is going to happen in the economy is notoriously difficult – aside from anything else, events like the pandemic come out of nowhere.

I think this sort of approach helps make the trust an option worth considering for investors who don’t know where to start.

Returns should not be wildly different from those of the market as a whole from year to year, and so that sinking feeling of having chosen the wrong investment should be diminished, but there is the potential to outperform over the long run because the underlying portfolio on a stock level is very different from the index.

Additionally, the amount of expertise that Craig, Stuart and Mark can draw on in selecting managers and building the portfolio is second to none.

Willis Towers Watson does thousands of manager meetings a year and has dozens of specialist fund analysts tracking the market. Thanks to their large presence in the institutional market, they have levels of access to managers that retail investors couldn’t begin to replicate.

This should, I think, provide some reassurance to investors that their money is being well looked after.

How Alliance Trust has performed and what it holds

Alliance Trust performed extremely well in 2023, outperforming the MSCI ACWI benchmark. This is notable as the trust is structurally underweight the Magnificent Seven, which were the story of the year and drove markets higher.

In 2024, the market has narrowed further, and Nvidia has been the key stock. The underlying portfolio is underweight Nvidia, and this has hit returns versus the index.

As of the end of October, the trust was essentially in line with the benchmark since the new strategy was adopted in 2017, with total shareholder returns of 106 per cent, but this was very different as of the end of last year and reflects the impact of what has happened over 2024, which I think is likely to be exceptional: it is highly unlikely one singe mega cap stock will continue to outperform to this degree.

Alliance Witan has plenty of technology exposure though, with Microsoft and Amazon being large positions. It also owns Eli Lilly and Novo Nordisk, the two main manufacturers of the anti-obesity wonder drugs.

Unlike some of the well-known Global investment trusts like Scottish Mortgage or Lindsell Train, it is much less concentrated in individual stocks, and less likely to suffer such significant swings in value.

To be clear, Alliance Witan’s approach means if global markets fall, it will likely fall by a similar amount. There is still equity risk involved in this trust, and it doesn’t provide the security blanket of cash.

A global trust insulated from hot markets

Thanks to the unique strategy, the trust is much less exposed to the hottest areas of the market such as technology and AI, and so if there is any sell-off there, it should be relatively insulated.

Indeed, it is impressive that the trust has managed to keep pace with markets over the past couple of years as such a small number of stocks have driven indices higher. It is perhaps some evidence that the stock pickers that have been selected are indeed good at picking stocks.

This is one attractive feature of an interesting package that could offer a lot to those who want to invest but don’t want to become market-watchers or fund-pickers.