TIDMATST
RNS Number : 0986R
Alliance Trust PLC
04 March 2021
Alliance Trust PLC
4 March 2021
54 Years of Rising Dividends
Results for the year ended 31 December 2020
Performance Highlights
-- In 2020 the Company's share price increased to a near record
high and Total Shareholder Return(1) (TSR) amounted to 9.4% (2019:
24.3%).
-- The Company's Net Asset Value (NAV) Total Return(1) was 8.5%
(2019: 23.1%) while the Company's benchmark index, the MSCI All
Country World Index (MSCI ACWI), returned 12.7% (2019: 21.7%).
-- The Company's TSR and Equity Portfolio Total Return, before
fees, are in line with the benchmark for the period between 1 April
2017 (when the Company appointed its Investment Manager) and 31
December 2020.
-- The portfolio remains structured for long-term growth and has
delivered a resilient performance in a year of global turmoil in
which the benchmark return was skewed by the performance of the
very largest companies.
-- Partly assisted by the benefit of accumulated reserves, the
Company has increased its total ordinary dividend by 3% in 2020,
marking the 54(th) consecutive annual increase.
Gregor Stewart, Chairman of Alliance Trust PLC, commented:
"Despite the unparalleled turbulence of 2020, the Company ended
the year with its share price at a near record level and its run of
increasing dividends extended to 54 consecutive years. It is
disappointing that the Company did not outperform its benchmark,
but this is not surprising given that index returns were heavily
skewed towards a handful of fashionable US large and mega-cap
stocks. As the roll out of vaccines develops and the global
economic recovery broadens out across industry sectors, your Board
and our Investment Manager remain confident that the Company's
diversified but high conviction portfolio is well placed to deliver
long-term outperformance."
About Alliance Trust PLC
Alliance Trust aims to deliver long-term capital growth and
rising income from investing in global equities at a competitive
cost. We blend the top stock selections of some of the world's best
active managers, as rated by Willis Towers Watson, into a single
diversified portfolio designed to outperform the market while
carefully managing risk and volatility. Alliance Trust is an AIC
Dividend Hero with 54 consecutive years of rising dividends.
https://www.alliancetrust.co.uk
For more information, please
contact:
Mark Atkinson
Head of Marketing and Investor Sarah Gibbons-Cook
Relations
Alliance Trust PLC Quill PR
Tel: 07918 724303 Tel: 020 7466 5050 / AllianceTrust@quillpr.com
[1] Alternative Performance Measure
-S-
Chairman's Statement
"Despite the unparalleled turbulence of 2020, the Company ended
the year with its share price at a near record level and its run of
increasing dividends extended to 54 consecutive years. It is
disappointing that the Company did not outperform its benchmark,
but this is not surprising given that index returns were heavily
skewed towards a handful of US large and mega-cap stocks. As the
roll out of vaccines develops and the global economic recovery
broadens out across industry sectors, your Board and our Investment
Manager remain confident that the Company's diversified but high
conviction portfolio is well placed to deliver long-term
outperformance."
-- In 2020 the Company's share price increased to a near record
high and Total Shareholder Return (TSR) amounted to 9.4%. Net Asset
Value (NAV) Total Return was 8.5% while the Company's benchmark
index returned 12.7%.
-- The Company's TSR and its Equity Portfolio Total Return are
in line with its benchmark return for the period between 1 April
2017, when the Company appointed its Investment Manager and 31
December 2020.
-- The portfolio remains structured for long-term growth and has
delivered a resilient performance in a year of global turmoil
during which the benchmark return was skewed by the performance of
the very largest companies.
-- Partly assisted by the benefit of accumulated reserves, the
Company has increased its ordinary dividend for 54 years and it
expects to pay a higher dividend in 2021 and beyond.
2020 was marked by the far-reaching consequences of the Covid-19
pandemic. Global stock markets collapsed in March in the most
intense decline since 1929. Massive fiscal and monetary
interventions led to a rebound, which accelerated as positive news
emerged about vaccines. Markets also had to contend with the
protracted negotiations over the terms of the United Kingdom's
trade agreement with the European Union and one of the most
contentious US elections in that country's history.
The Company's Investment Manager, Stock Pickers and Executive
team successfully transitioned to working remotely, with no
interruption to our operations; they are all commended for
this.
Despite the economic effects of the pandemic, the Company
delivered an increase in its NAV and dividend while the discount
remained steady and costs were kept competitive with an Ongoing
Charges Ratio (OCR) of 0.64% (2019: 0.62%).
PERFORMANCE
Returns from investing in global equities have been dominated
for the last three years by a small number of the world's largest
growth stocks (most notably in the US and China). The impact of the
pandemic in 2020 was to amplify the market's level of concentration
in these stocks. The Company's portfolio is underweight the larger
companies as a group and has proportionately more capital invested
in a broader range of stocks. This particularly affected the
Company's relative performance against its benchmark for the year.
It was encouraging to see the market begin to reduce its
largest-cap concentration towards the end of 2020 as the news on
vaccines began to have a positive impact on more cyclical companies
and value stocks which have struggled for some years. The Board and
Investment Manager remain confident that, notwithstanding the
underperformance against the particularly concentrated benchmark in
2020, the portfolio is well placed for long-term outperformance as
the impact of the recovery broadens further.
It is now nearly four years since the Company appointed Willis
Towers Watson (WTW) as its Investment Manager and implemented its
multimanager approach. Between 1 April 2017 and 31 December 2020,
the Company's TSR was 41.0%, with the MSCI ACWI returning 41.4%.
The Company's NAV Total Return over the same period was 37.9%;
during the initial period, the NAV performance was adversely
affected by the non-equity assets that the Company sold prior to
the end of 2019. The Equity Portfolio Total Return was 41.3% over
the same period, broadly in line with the benchmark.
The Investment Manager's report on pages 10 to 29 of the Annual
Report provides more detail on the Company's performance.
Despite the volatile economic background, demand for the
Company's shares was encouraging. A number of new wealth managers
joined the share register and retail demand for the Company's
shares was healthy. There was a limited need for share buybacks
during the year with the Company buying back only 2.3% of its
shares (1.4% in 2019), adding GBP1.6m to the NAV for remaining
shareholders. Excluding some short-term volatility in March and
April, the discount again remained within a relatively narrow range
and averaged 5.6% for the year (2019: 5.0%). The discount narrowed
in the last two months of 2020 and as at 31 December 2020 was 3.5%
(2019: 4.1%).
AN INCREASING DIVID IN UNCERTAIN TIMES
The pandemic has severely reduced the dividends paid by many
companies and this affected the Company's income in 2020. However,
investment trusts are able to use their reserves to bolster their
dividends in times of reduced income and Alliance Trust has one of
the largest revenue reserves of any investment trust (GBP99.2m
after the 2020 dividend). The Board chose to use GBP10.0m of its
revenue reserves to support this year's increased dividend in spite
of what we hope is a temporary reduction in dividend receipts.
I am pleased to report that the Company's ordinary dividend has
increased for the 54th consecutive year. The total ordinary
dividend for the year was 14.38p, an increase of 3% on last year.
The Board expects that it will continue to extend its record of
year-on-year increases in dividends. Even in the extremely unlikely
event that the Company receives no dividends at all from its
portfolio over the next two years, it could continue to pay an
increasing dividend from its revenue reserves alone.
To further enhance the Company's ability to pay an increasing
dividend in the future, the Board intends to ask shareholders at
the Annual General Meeting (AGM) for approval to convert its merger
reserve of GBP645.3m into a further distributable reserve. We
provide more detail in this regard on page 35 of the Annual
Report.
INVESTING RESPONSIBLY
Responsible investing means behaving as long-term owners, not
just temporary traders of stocks. Shares give us rights and
responsibilities to ensure that our capital is being invested in a
way which does not exploit society or the environment. Companies
that fail to take account of their effect on the societies in which
they are embedded will ultimately lose their licence to operate,
either by government legislation or the withdrawal of customer
support.
The Board sees the consideration of Environmental, Social and
Governance (ESG) matters as integral to the investment decisions
made on behalf of the Company and a cornerstone to ensure that the
management of companies are taking seriously the challenges facing
current and future generations. Incorporating these factors has the
dual benefits of reducing inherent risk and enhancing the
sustainability of returns.
While the Company would much rather encourage positive change
through its stewardship and engagement activities, the Board will
consider excluding certain types of stocks from its portfolio. The
current limited exclusions were reviewed by the Board during the
year. If the Board believes that positive change cannot be brought
about by engagement alone, it may decide to impose further
restrictions on the stocks it holds.
Climate change is one of the biggest economic and political
challenges the world faces. As an investment trust with a small
physical presence, the Company itself has limited impact on the
environment and is now a net zero carbon emissions business. The
Company encourages its Stock Pickers to engage actively with
investee companies on their own plans to reduce their carbon
emissions. WTW monitors the carbon intensity of the Company's
portfolio against recognised benchmarks.
In addition to the efforts of the Company's Stock Pickers, the
Company uses EOS at Federated Hermes (EOS) to focus on seeking
long-term improvements on all aspects of ESG.
You can read more about this developing topic on pages 24 to 29
of the Annual Report, including examples of how the Company has
sought to exercise effective stewardship and influence over
investee companies. These examples demonstrate the range of issues:
from fossil fuel exposure to human rights in the Middle East,
access to water in Asia and the urgency of developing the global
availability of the Covid-19 vaccine.
BOARD CHANGES AND SUCCESSION PLANNING
I was pleased to welcome Jo Dixon to the Board in January 2020.
Jo took on the role of Chair of the Audit & Risk Committee in
March and her appointment added to the Board's existing skills and
expertise, particularly its financial and audit knowledge.
Our Senior Independent Director, Karl Sternberg, and two of our
other directors, joined the Board in 2015. As part of the Company's
succession plans, Karl will stand down on 30 June 2021. In the
future, we will address systematically the need for Board
refreshment, including that of the Chairman, while maintaining as
much continuity and corporate memory as possible. We commenced a
recruitment process prior to the year-end for at least one new
Director. This has concluded and we are delighted to welcome Sarah
Bates and Dean Buckley to the Board; both bring with them skills
and experience that will complement those of the current Directors.
More information on their specific skills and experience can be
found in the AGM Notice of Meeting and on the Company's
website.
ENGAGING WITH SHAREHOLDERS
The increased use of online meetings and webinars allowed the
Company to engage with its stakeholders throughout the year.
Regardless of when current restrictions are relaxed, the Board
wants to continue to engage with as many of its shareholders as
possible. I have initiated a series of online meetings with a
number of shareholders, as well as a webinar after the AGM. Further
electronic presentations are planned for later in the year.
It was disappointing that due to Covid-related government
restrictions I was unable to welcome shareholders to the 2020 AGM.
Unfortunately, this is likely to be the case this year as well. We
will be holding our AGM in Dundee but, due to the continuing
restrictions and concerns about public health, attendance will be
restricted to only a limited number of Board members and
representatives from the Company. Shareholders will be able to view
the meeting live and submit questions in advance or during the
meeting. Any questions we are unable to address during the meeting
will be answered afterwards and details of all the questions and
answers will be published on the Company website. Full details of
how to view the meeting and submit questions will be sent to all
shareholders and will be on our website. At the webinar immediately
after the formal meeting, shareholders will be able to hear
presentations from the Investment Manager and from Vulcan and
Jupiter, two of the Company's Stock Pickers.
The Company's Articles of Association (Articles) allow for
voting via appointed proxies but do not permit remote voting. While
the Company does not intend to hold any completely virtual general
meetings, the Board will be asking shareholders to approve changes
to the Articles to permit remote voting at future meetings if
shareholders are unable to attend.
We will keep shareholders updated on arrangements for the AGM,
webinar and other investor events through our website. You can also
sign up to receive details of events and the Company's monthly
factsheet and quarterly newsletter via the website.
OUTLOOK
What will happen in 2021 and beyond is far from clear as the
pandemic continues to affect economies and government finances
across the world. Economic policy-making is probably more uncertain
than at any time since the 1970s. We believe that the Company's
portfolio, focusing as it does only on the highest conviction
choices of its Stock Pickers across the global market will deliver
attractive outperformance in the long run.
Gregor Stewart
Chairman
3 March 2021
Investment Manager's Report
-- While the Company's portfolio has delivered 41% since we were
appointed, it lagged behind the benchmark over the year as the
market continued to be dominated by large-cap technology and
e-commerce companies, boosted by the Covid-19 pandemic.
-- Vaccine distribution programmes should help secure the return
of less sentiment-driven, broader markets with a focus on company
fundamentals, which should benefit our stock selection based
strategy.
-- The portfolio is comprised of the 'best ideas' of our Stock
Pickers, selected based on their attractive fundamentals and
forward prospects, which drive company valuations over the long
term.
-- Having experience running the Company's portfolio over
periods of broader markets, as well as running portfolios with
similar strategies for a number of years, we are confident that the
strategy can deliver attractive outperformance.
INVESTMENT YEAR 2020
It's not yet clear how much the Covid-19 pandemic has
permanently changed our lives or to what extent we will return to
"normal" over the next year, but 2020 will undoubtedly go down as
the most tumultuous year in living memory. At the forefront of all
our minds is the human tragedy, but there is at least hope that a
widespread programme of vaccination will bring an end to the
immediate crisis before too long.
In the markets, investors had a rollercoaster ride. After one of
the fastest collapses in the equity market in history, government
and central bank stimulus packages triggered a dramatic recovery in
share prices, with many markets ending the year at record highs.
The 12.7% gain delivered by the MSCI ACWI Index(1) in 2020 was
unevenly spread across countries and sectors. Equity markets in
2020 were dominated by the advance of technology and e-commerce
companies. These companies profited from an increased shift to
online consumption and a rising demand for technology solutions and
digitalisation as many of us started spending more time at home.
Larger companies generally benefitted from the significant levels
of liquidity injected by central banks, being able to access it
more easily than their smaller peers. Longer duration growth stocks
in particular benefited from the suppressed levels of interest
rates. As such, the US and China large-cap, tech-driven companies
that have dominated markets over the last few years continued to do
so throughout most of 2020, gaining from the perfect storm created
by the coronavirus pandemic.
Cyclical sectors were particularly hard hit, especially in areas
such as 'bricks and mortar' retail, hospitality and travel.
Throughout 2020 we witnessed Covid-19 devastate our high streets,
as numerous retail outlets gradually succumbed to insolvency. The
Energy sector was the worst performing sector over the year, hit by
the negative impact of economic slowdown and lockdowns. This
negative momentum was further amplified by tensions between Saudi
Arabia and Russia.
The impact of multiple lockdown measures on company earnings was
a key concern for many investors in 2020. Business models of
thousands of companies were challenged as access to consumers was
limited and workers were furloughed. This led to many businesses
cutting or suspending dividend payments.
However, positive news on vaccine development in November
triggered a market rotation, with many cyclical, smaller-cap
companies coming to the fore. In this strong 'risk-on' environment
we saw a recovery in riskier and lower quality names and a
unwinding of the performance gap between large and small-cap stocks
seen earlier in the year. The regional pattern of performance also
shifted to some degree in the last quarter with the UK market, long
the laggard, starting to gain some ground.
Geographically, we saw significant divergence in the impact of
the Covid-19 pandemic across the world with each government's
varied responses to the pandemic. The whole of Asia was hit first
but as the year progressed Asia emerged better off, having been
able to control the pandemic more effectively. US equity markets
saw strong returns maintained, given the dominance of US technology
names in the index and the scale of the fiscal and Federal Reserve
stimulus. Despite the fourth quarter rebound, the UK was the worst
performing region over the year, with UK index returns weighed by a
heavier reliance on the Financials and Energy sectors which were
hard hit in 2020, as well as Brexit uncertainty, which amplified an
already difficult market and economic backdrop.
As well as reinforcing the dominance of New Economy stocks,
Covid-19 also intensified the focus on Environmental, Social and
Governance issues - we provide some insight into these factors on
pages 24 to 29 of the Annual Report.
1. MSCI All Country World Index Net Total Return in GBP.
PERFORMANCE FROM 1 APRIL 2017 TO 31 DECEMBER 2020 (%)
Alliance
Trust Total Shareholder Return 41.0
NAV Total Return (net of all costs) 37.9
---------------------------------------------------------- -----
Equity Portfolio Total Return (before fees)
- equivalent to pro forma NAV Total Return 41.3
---------------------------------------------------------- -----
Benchmark MSCI ACWI 41.4
--------------------------------------------- -----
Peer Group MSCI ACWI Equal Weighted Index 24.7
--------------------------------------------- -----
Passive alternative - iShares ETF 40.4
---------------------------------------------------------- -----
Peer Group Median 40.7
---------------------------------------------------------- -----
Notes : All figures are measured from 1 April 2017 with data
provided as at 31 December 2020. All figures may be subject to
rounding differences. The benchmark shown is the MSCI ACWI Net
Dividends Reinvested. The passive alternative iShares is the
BlackRock iShares MSCI ACWI ETF. The peer group is the Morningstar
universe of UK retail global equity funds (open ended and closed
ended). The performance of the passive alternative iShares ETF and
peer group is after fees. The NAV Total Return is after all manager
fees (including Willis Towers Watson's fees) and allow for any tax
reclaims when they are achieved. The NAV Total Return figure is
based on NAV including income with debt at fair value. The
Company's NAV Total Return reflects the impact of holding non-core
investments and Alliance Trust Savings until 30 June 2019. The
Equity Portfolio Total Return is before fees.
Sources : Investment performance data is provided by BNY Mellon
Performance & Risk Analytics Europe Limited, Morningstar and
MSCI Inc. The peer group source is Morningstar.
OUR PORTFOLIO
The NAV Total Return for the year was 8.5% and TSR was 9.4%,
with the MSCI ACWI returning 12.7%. The Company's portfolio was
particularly hard hit in the Covid-related correction in the first
quarter of the year, when value and smaller to mid-cap companies
most sensitive to economic conditions, such as Airbus, Aercap or
Capita, were penalised. The portfolio then recovered some ground in
the second and third quarters of the year as fundamentals came back
into focus, allowing the strength of businesses to show
through.
However, our Stocks Pickers' focus on high quality companies
meant that we did not fully participate in the strong rally of
low-quality, cyclical stocks that occurred in November and December
after vaccines for Covid-19 were approved.
It was a difficult year for active managers generally with
median stock returns for the MSCI ACWI universe lagging behind the
benchmark by 11% over 2020, and significant divergence in the
returns of the best and worst performing stocks. Yet again large
and mega-cap stocks dominated the market, with the MSCI ACWI
Equally Weighed Index returning 9.3%, underperforming the MSCI ACWI
Market Capitalisation Weighted Index by 3.4% over the full year. As
a consequence, despite posting attractive positive returns, the
Company's portfolio underperformed the benchmark due to its more
balanced exposure across the size spectrum of companies, and an
underweight to large-cap stocks.
The impact of the largest stocks on the index returns over 2020
is illustrated in the chart below. Up to 45% of the MSCI ACWI
return over the period came from just five stocks, namely,
Facebook, Amazon, Apple, Microsoft and Google (Alphabet) (FAAMG).
Apple alone accounted for 17% of the benchmark's return over the
period. The Company's portfolio has no position in Apple which
significantly detracted from relative performance, although it does
hold a number of the mega-cap names, and performance did benefit
from this over the period. Unlike the passive allocations within
the benchmark, based on the market capitalisation of a company, the
portfolio's holdings constitute the high-conviction, active
decisions of our Stock Pickers, based on a thorough analysis of
their fundamentals. Should there be a shift in these fundamentals
that would concern our Stock Pickers, they would swiftly move to
adjust their positioning.
Despite holding some of the mega-cap names, the portfolio has a
more balanced allocation than the Index across various other
stocks, in particular mid and small caps. The portfolio is
generally underweight in large-cap stocks - those with a market
capitalisation of more than $10bn - and overweight mid and smaller
caps. The investments in small to mid-cap stocks detracted value
over 2020.
Between 1 April 2017 when we were appointed and 31 December
2020, the TSR was 41%, the NAV Total Return was 37.9% and the
Equity Portfolio Total Return was 41.3% (this latter measure
excludes the negative impact of legacy investments that were sold
prior to 2020). The MSCI ACWI returned 41.4% over the same period
and the MSCI ACWI Equally Weighed Index, 24.7%. The Company's
peers, as measured by the Morningstar universe of UK retail global
equity funds (open and close ended), returned 12.7% over the year
and 40.7% since April 2017 when we were appointed.
Since our appointment, we have seen the stock selection of our
Stock Pickers add value. However, this has been offset by the
underweight to large-cap stocks that have delivered the strongest
returns. The narrow leadership of large-cap stocks that has
dominated markets over the last three years will not continue
forever. Based on our experience of running the Company's portfolio
in broader markets back in 2017 as well as our longer track record
of running similar strategies for our institutional clients, we
know this approach delivers value over the long term.
With a vaccine distribution programme in progress and the UK-EU
trade deal approved, we see greater opportunities for a
widening-out of the market, as lockdowns end and economies recover,
which should lead to stronger returns for the Company's diversified
portfolio. You can read more about our Outlook on page 23 of the
Annual Report.
THE IMPACT OF THE FAAMG ON THE MSCI ACWI'S TOTAL RETURN (%)
% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020
FAAMG contribution
to return 0.6 0.2 -0.4 1.4 2.5 3.7 4.0 5.7 4.9 4.4 5.2 5.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Rest of stocks
contribution to
return -1.2 -5.9 -18.8 -11.1 -4.8 -3.1 -3.9 -1.4 0.4 -2.5 6.4 7.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
MSCI ACWI Total
Return -0.6 -5.7 -19.3 -10.0 -2.7 0.1 -0.4 3.8 4.9 1.3 11.3 12.7
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Source: FactSet, MSCI Inc. and WTW.
FAAMG SHARE OF THE INDEX RETURN IN 2020
Alphabet Inc. 0.5%
Facebook Inc. 0.4%
-----
Microsoft Corporation 1.2%
-----
Apple Inc. 2.2%
-----
Amazon.com Inc. 1.5%
-----
Rest of stocks 6.9%
-----
Source: FactSet, MSCI Inc. and WTW.
STOCK PERFORMANCE
Stocks that improved performance
Several stocks in the portfolio benefitted from the further
momentum in the e-Commerce and Technology sectors resulting from
the pandemic. Our best contributor was NVIDIA Corporation (NVIDIA),
which was purchased in 2019. This is an American technology company
that designs graphics processing units for the gaming market as
well as computer electronics systems for the mobile computing and
automotive industry. The company's computer chips are used in a
variety of end markets, including complex computing applications
such as Artificial Intelligence (AI) and autonomous driving. NVIDIA
was perfectly positioned to benefit from the major trends of cloud
computing, AI and online gaming and was up 115% over the year. It
reported strong earnings momentum, driven by a dramatically higher
demand for cloud computing and gaming. Additionally, the
announcement that the company plans to acquire ARM Holdings, a
British designer of computer processing units, was viewed
favourably by market participants, as this will help to round out
NVIDIA's overall product portfolio.
Baidu , the largest Internet search engine in China with over
70% market share, was also a positive contributor to the
portfolio's returns. Baidu is a technology-driven company and has
been investing heavily in autonomous driving and AI, as well as in
areas such as computer vision, healthcare, quantum computing,
natural language, robotics, machine and deep learning and
high-performance computing. The company is attractively valued,
particularly when considering its stakes in iQIYI (online video
platform that is a key growth driver due to an increased
willingness to pay for premium content as well as strong
advertising demand), Ctrip (online travel website) and its excess
capital (net cash position). Despite some volatility during the
year, due to temporarily depressed profitability along with
investors' general fears about the Chinese economy, Baidu has
delivered strong returns over the whole period, up 66% in 2020.
Baidu is now starting to monetise its research and development
spend over the last few years and has seen mobile-app traffic
growth and a recovery in advertising revenue. The company has a
strong market position to benefit from the long-term growth of
domestic
consumer spending in China.
Another contributor to the Company's portfolio performance was
e-commerce and cloud-computing leader, Amazon, up 71% over the
year. The company benefitted from increased demand for its retail
and cloud services as consumers transitioned to shop online versus
in stores, and its cloud business also benefited from increased
demand. The company delivered very strong retail results over the
year, surpassing analyst expectations. Advertising revenues
continued to be in line with our Stock Picker's expectations.
Despite the market rotation out of technology and tech-related
companies since November 2020, our Stock Pickers believe Amazon is
exceptionally well positioned to capitalise on secular growth
trends in e-commerce, cloud computing and advertising and has
attractive future growth prospects.
Stocks that detracted from performance
Unsurprisingly, of the stocks held in the portfolio, it was
aerospace stocks that lagged most, given the impact of coronavirus
and the effect of lockdowns on the travel industry. Airbus was the
worst contributor over the year, down 27%. Prior to the pandemic,
Airbus, the French aerospace corporation, had a strong cash balance
sheet and whilst there were certain one-off cash outflows expected,
the company was able to withstand pressures with EUR30bn of
available liquidity (compared to EUR12.5bn of net cash in 2019) and
to support its customers and suppliers when prudent. Airbus also
announced prudent steps to ensure its ongoing resilience such as a
EUR15bn credit facility, a delay to the dividend payment of
EUR1.4bn, suspending top-up pension funding as well as other cost
and operational measures. A proportion of Airbus' net cash is
customer pre-payments, but its commercial aircraft backlog is
overwhelmingly in the narrow-body segment (80%+), which has a long
order book (and lower risk of cancellations, though some are
inevitable). Airbus operates what it calls 'watch tower' lists
where customers can change their place in the delivery queue. This
is important as some airlines suffered after the global financial
crisis when they cancelled orders and rejoined at the end of a long
list. In short, our Stock Picker believes management are doing all
the right things to manage the impact of the crisis and are well
placed over the long term to deliver strong returns.
Another aerospace company that detracted value over 2020 is
AerCap. AerCap is the global leader in aircraft leasing with one of
the most attractive order books in the industry. AerCap serves
approximately 200 customers in approximately 80 countries with
comprehensive fleet solutions. The market heavily penalised the
company in the earlier part of the year as a result of the impact
of the Covid-19 pandemic on its airline customer base. However, our
Stock Picker maintained confidence in the resilience of the company
and its ability to manage through the turmoil and bounce back. The
company saw a strong price rebound in November as the vaccine news
emerged. Over the full year, the stock was down 28%.
The fact that operating leases are enforceable legal obligations
that airlines have to pay when their planes are half empty, or
grounded, or even when they have entered bankruptcy for
reorganisation, provided our Stock Picker with some reassurance. If
an airline does not pay its lease, the aircraft lessors quickly
repossess the aircraft and work toward placing it with another
airline. This is how they avoid credit losses even when customers
stop paying. Clearly, in the unprecedented environment of 2020,
Aercap did suffer earnings revisions, given pressure on lease rates
and rents and asset impairment. However, the company took proactive
steps to manage its position throughout the pandemic and has a
strong balance sheet and liquidity position. During the year, the
company was able to issue long-term unsecured debt at attractive
rates, lower than the company's pre-2020 average cost of debt. The
company's strong liquidity position should provide AerCap with
attractive opportunities to deploy its capital as the recovery
continues.
Together, Airbus and AerCap detracted 1.5% from the relative
performance of the Company's portfolio versus the benchmark.
Capita , the UK technology firm, was another company that
contributed negatively to the Company's portfolio return. The stock
was down 76% over the year. Despite this negative momentum, our
Stock Picker remains positive on the company.
Capita provides critical software and outsourcing services for a
wide range of public and private sector customers. Our Stock Picker
believes that large investments made by the company over the last
two years, in people and processes, should pay off over time. There
are positive signs of a turnaround - operating performance on
contracts and employee engagement metrics, the critical foundations
of the business, are improving. Operating cash flow is beginning to
improve as the strategy of fixing underperforming contracts,
improving operational efficiency, renewing contracts on better
terms and targeting higher margin digital BPO (Business Processing
Outsourcing) contracts comes through. For now, these positive
developments have been swamped by the impact of Covid-19, meaning
that achieving sustainable free cash flow (FCF) has been pushed out
by one to two years. Likely disposals at attractive multiples from
the Software division should act as a positive catalyst for the
share price. If executed successfully, this would highlight the
remainder of the business, offering a greater than 20% FCF yield
with a materially strengthened balance sheet.
Despite the challenges of the last few years with markets driven
by a small number of the largest stocks, we believe the portfolio
has been resilient and we are excited about the opportunities
ahead. Towards the end of 2020 we experienced a sea change in the
dominance of the tech giants, which may continue into 2021 and
beyond as we emerge from the Covid-19 crisis. We also see a much
greater focus on Responsible Investment and on ESG risks as
investors choose a long-term sustainable portfolio over a
short-term-focused portfolio which can be prone to greater risk and
volatility.
Our approach to investing is very different to passive investing
and to that of many other managers. It allows you to access a
manager's 'best ideas' knowing that they consider these risks as
part of their decision-making process. This should provide
shareholders with comfort that the portfolio should be well
positioned for a sustainable return.
STOCK PICKER PERFORMANCE
Allocating to a single manager's concentrated portfolio can be a
bumpy ride. Individually, the return paths of each of our Stock
Pickers can be quite volatile and differ significantly from one
another. However, blending their stock selections into a portfolio
that we risk manage in terms of style, sector and country
exposures, and which is diversified across several complementary
strategies, leads to a much smoother return path.
Over most of 2020, there was a continued momentum of growth
stocks, with many companies benefitting from the current
environment. As a result, our growth focused Stock Pickers such as
GQG and SGA continued to deliver strong returns, particularly over
the first nine months of the year. Some reversal in the growth
trend was seen in the fourth quarter, on the back of positive
vaccine news which provided some bounce to the value-focused
managers and cyclical sectors. This led to a rebound in performance
by Lyrical, River and Mercantile, Black Creek and Jupiter in this
period, providing some reprieve in what has been a very tough
environment for value managers.
We do not express a view on which style will perform better
going forward nor are we aiming to time the inflection point. This
is a skill that we do not believe many people possess and instead
we have conviction in the ability of our Stock Pickers to find good
companies which will deliver superior returns over the long-term.
The idea is to ensure that the portfolio return is driven by stock
selection, instead of any style, sector, or country level biases.
We believe that the complementary styles of the current Stock
Pickers leave the portfolio well positioned to take advantage of
any changes to the markets that 2021 may bring.
WHERE WE INVEST
Each of our Stock Pickers has a global mandate, with GQG also
having an emerging markets mandate. Each Stock Picker is
unconstrained in terms of where they can invest. There are also
very limited restrictions on what each Stock Picker may invest in,
although this is something that the Board has been discussing with
us in relation to the Company's responsible investment activities.
You can find out more about this on pages 24 to 29 of the Annual
Report.
The largest country position is the US, which saw strong returns
maintained throughout 2020. At 54.8% of the portfolio as at 31
December 2020, this represents a slight underweight to the
benchmark weight which was 57.4%. The exposure to the US has
increased over the last 12 months and the allocation to the UK and
Europe has reduced. The Company's portfolio had an allocation to
the UK of 10.4% as at 31 December 2020, an overweight of 6.6%
versus the MSCI ACWI, the largest relative position. Most of the UK
exposure, however, is through investments in global companies.
These are the companies that our Stock Pickers believe have the
most attractive long-term prospects, irrespective of the challenges
that Brexit, for instance, might pose. Our allocation to the UK is
a representation of the stock selections made by our Stock Pickers
and is not driven by a top down view on the UK market.
The best-performing sector over the period was Information
Technology, up 41% for the year, the biggest sector allocation
within the portfolio, with a weight of 20.2% as at 31 December
2020, a slight underweight versus the index weight of 21.8%. The
sector was boosted by the pandemic with the shift of many to
working from home and a greater impact of technology in our lives.
The dominance of the FAAMGs receded slightly in the last quarter of
the year, on the news of momentum in vaccine developments.
The Energy sector was the worst performing sector over the year
as demand for oil plummeted, fuelled by the negative impact of the
lockdown at both a global and local level and the ensuing economic
slowdown. The Company's portfolio was underweight in the Energy
sector, with a position of 1.5% as of 31 December 2020 versus a
weight of 3.0% in the MSCI ACWI.
REGION
North America 57.6%
Europe 15.7%
------
Asia & Emerging
Markets 14.0%
------
UK 10.4%
------
Stock Picker Cash 2.3%
------
Source: The Bank of New York Mellon (International) Ltd and MSCI
Inc.
SECTOR
Information Technology 20.2%
Consumer Discretionary 16.0%
------
Communication Services 14.3%
------
Industrials 12.7%
------
Financials 12.4%
------
Health Care 10.7%
------
Materials 5.4%
------
Consumer Staples 3.5%
------
Energy 1.5%
------
Real Estate 0.6%
------
Utilities 0.4%
------
Stock Picker Cash 2.3%
------
Source: The Bank of New York Mellon (International) Ltd and MSCI
Inc.
PORTFOLIO INVESTMENT CASE STUDY: SGA
PayPal
PayPal is the leading accepted payment form for online
merchants, given its strong brand name and high customer trust. The
company provides safer and simpler ways for businesses to accept
payments from merchant websites, mobile devices, applications and
at offline locations through a wide range of payment solutions
across their platform. PayPal's two-sided platform, where it serves
both customers and merchants, drives increased user engagement and
trust, as well as higher merchant conversion rates. PayPal is able
to continue gaining market share among payment options due to the
breadth of services it provides to merchants, its seamless user
experience and its better than industry-average checkout conversion
rates. This has led to it having the highest digital wallet
acceptance by merchants.
The company benefits from high recurring revenues, given that
payments are recurring in nature. PayPal's ability to expand both
its consumer and its merchant base leads to increased stickiness by
customers and greater repeatability. PayPal's long-term growth
trajectory is enhanced by the secular trend towards greater
e-commerce consumption and digitalisation of payments and financial
services, as consumers move away from cash and credit cards toward
electronic payments.
The company has the potential for additional monetisation
opportunities in some of its earlier lifecycle businesses such as
leading peer-to-peer payment platform Venmo, Bill Pay, Offline
usage via QR code and PayPal/Venmo credit options, as well as
further international expansion. We see the Covid-19 pandemic
further accelerating the adoption of e-commerce and the use of
digital currency instead of cash, which will benefit PayPal over
the long-term as the most dominant digital wallet provider
globally.
PORTFOLIO CHANGES
During the year, our Stock Pickers took time to review their
holdings to ensure they were still satisfied with their long-term
thesis, ensuring strength of earnings and company fundamentals, and
resilience to pressures from the pandemic. They also took advantage
of some of the opportunities that market volatility unearthed. As a
result of changes made, which includes changes in Stock Picker
allocations and the appointment of Lomas Capital Management (Lomas)
and the termination of First Pacific Advisors (FPA), stock turnover
during the period was 77.3% (52.3% in 2019).
Significant Stocks Purchased:
VINCI
A French company, which operates toll roads and airports and
also has a construction business. The stock was affected by the
lockdown, especially in France, and shares fell, allowing for it to
be purchased at a very attractive price. Despite short-term
pressures, the company has an all-time high order book for
projects.
Transdigm Group Inc.
Transdigm provides thousands of niche-piece part components for
use on commercial and military aircraft. The company's products are
proprietary and sole-sourced, giving them a significant competitive
advantage. This aerospace company was hit hard by the limitations
on international travel during the pandemic but is expected to
rebound quickly once travel picks up again in the recovery.
Mercadolibre Inc.
A leading Latin American e-commerce company seeing strong,
diversified growth and market share gains combined with fundamental
business acceleration.
Skyworks Solutions Inc.
A semi-conductor manufacturer purchased in the first quarter of
2020. The company is competitively entrenched as one of the three
major manufacturers of radio frequency systems for mobile devices
including mobile phones, tablets and, increasingly, other connected
devices in the 'Internet of Things'. The company benefitted from
Covid-19, with increased demand for telecom infrastructure,
reporting a 16% year-on-year revenue increase in 2020 and is well
placed to become a leading light in its sector.
Fiserv Inc.
A fintech company that develops the technology that banks and
financial institutions use to process payments and move money. The
company is well positioned as sales growth picks up and banks in
the US continue to consolidate and digitalise.
Significant Stocks Sold:
Carnival Corporation & plc
With cruising looking like it will take longer to recover
compared to other holiday/travel options, this holding was sold.
Carnival also had a balance sheet precariously exposed to any
extended period of low demand.
Cigna Corporation
An American worldwide health services organisation offering
health, pharmacy, dental, supplemental insurance and related
products and services. Whilst the company remains strongly
positioned in the markets in which it competes, against a backdrop
of rising US unemployment it was considered that commercial
membership growth would likely disappoint in the coming year.
ENI S.p.A.
The uncertain outlook for major oil companies led our Stock
Picker to sell ENI in the earlier part of the year. Uncertainty
surrounding oil majors' cash flows and dividends due to not only
the current economic situation reducing oil demand, but also a
changing demand dynamic from investors concerned about climate
change, were reasons for selling ENI.
STOCK PICKER CHANGES
Our Stock Pickers have very different approaches, style
exposures and risk profiles. Within the portfolio we aim to ensure
that the allocation to our Stock Pickers is balanced in terms of
risk, with each one contributing more or less evenly to the overall
risk of the portfolio. Usually we take a contrarian approach to
rebalancing, giving more capital to underperforming Stock Pickers
and reducing our exposure to outperforming ones. This year, due to
the evolving risk landscape, we actually reduced our exposure to
the underperforming value Stock Pickers who tend to have a higher
exposure to more cyclical, small to mid-cap companies as the risk
in this part of the market increased with the impact of the
pandemic. As such, to maintain a balanced level of risk in the
portfolio, we reduced our exposure to them in the early part of the
year, allocating more capital to the Stock Pickers focused on
larger cap, quality stocks with a lower risk profile. Towards the
later part of the year, we slightly increased the allocation to
value as risk profiles moderated, due to more certainty around a
vaccine and a route to recovery emerging.
The universe of managers is ever evolving, with new
opportunities arising all the time. In addition, changes can occur
at our Stock Pickers which mean, in some cases, we need to make
changes. In October, we appointed Lomas, a Stock Picker with a
focus on a thematic approach that provided a differentiated source
of return from the other Stock Pickers within the portfolio. In
parallel to adding Lomas, we terminated the appointment of FPA, as
the team managing the Company's assets, led by Pierre Py and Greg
Herr, decided to leave FPA.
In February 2021 we were notified by Lomas that, due to two
members of the senior management team wishing to retire, the
company would be shutting down. Clearly, this was disappointing
news, given their recent appointment and our conviction in their
ability as Stock Pickers. However, such events happen, and the
benefit of the multi-manager approach is that we can navigate the
loss of Lomas without disrupting the whole portfolio. Lomas'
allocation was redeployed in the 'best ideas' of our other eight
Stock Pickers. The transition ensured that the portfolio remained
balanced in terms of sector, style and country exposures and that
stock selection was the key driver of returns. Over the very short
period since their appointment to the end of December 2020, Lomas
lagged behind the benchmark by 3.8%.
The portfolio is well diversified and risk controlled without
Lomas, and there is no need to rush to appoint anyone new. We
continue to review our line-up of Stock Pickers to evolve the
portfolio and may make some changes in the not-too-distant
future.
PORTOFLIO INVESTMENT CASE STUDY: VERITAS
Catalent
It's one thing to have the eureka moment in a lab, when a drug
is proved to be effective, but another to ensure the drug is
produced in the right way with the appropriate percentage of
constituents, the delivery mechanism is optimal (tablet, syringe,
etc), production can be scaled up and transportation does not
destroy the product.
Catalent is a Contract Development Manufacturer (CDM) that
provides integrated services, delivery technologies and
manufacturing solutions to develop and launch pharmaceuticals,
biologics and consumer health products. Catalent makes 70 billion+
doses of all kinds of drugs each year. Globally, the company is
currently working with 75 Covid-related programmes including
antivirals, vaccines, diagnostics and treatments across its
biologics, gene therapy, oral technologies and clinical supply
businesses. For example, Moderna raised global production estimate
for its mRNA-based coronavirus vaccine for 2021 by 20% to 600
million doses. So far, the company's coronavirus vaccine has
received emergency use approval in the United States and
Canada.
Additionally, Israel's Ministry of Health also granted
authorisation to import the Covid-19 vaccine. Moderna has a supply
agreement for 200 million doses with the United States, which are
due to be delivered during the first half of 2021. The United
States government has an option for additional 300 million doses of
the vaccine. Moderna has signed an agreement with Catalent to
provide the vial filling and packaging of the virus. Catalent has
also signed an agreement with AstraZeneca to provide drug substance
manufacturing to AstraZeneca for the University of Oxford's
adenovirus vector-based Covid-19 vaccine, AZD1222, at Catalent's
commercial gene therapy manufacturing facility. This agreement
expands Catalent's support of the AZD1222 programme following the
announcement in June that Catalent's facility in Anagni, Italy,
would provide large-scale vial filling and packaging of AZD1222. As
governments around the world focus on public health post pandemic,
it's likely we will see drug developments for unmet medical needs
like cancer make a step jump in the coming decade and with it
demand for the services of CDMs like Catalent.
Our Stock Pickers
OUR PICK OF THE BEST*
Stock Picker Background Investment Style % of Portfolio
------------------------- ------------------------------ ------------------------- -----------------------
Black Creek Investment Black Creek is Long-term contrarian 11% (11% at 31
Management based in Toronto value-orientated December 2019)
and was founded buyers of leading
in 2004. Assets businesses across
under management the
as at 31 December market cap spectrum.
2020 were $9.8bn.
------------------------- ------------------------------ ------------------------- -----------------------
First Pacific Advisors FPA is an independently Seeks companies Nil (10% at 31
(FPA)(1) owned Los Angeles with high-quality December 2019)
based institutional business models,
money management financial strength
firm. The team and strong management
responsible for at a significant
managing the Company's discount.
portfolio left
FPA in October
2020.
------------------------- ------------------------------ ------------------------- -----------------------
GQG Partners GQG is a boutique Seeks high-quality 18% (14% at 31
investment management sustainable businesses December 2019)
firm focused on at reasonable prices
global and emerging whose strengths
markets equities. should outweigh
Headquartered in the macro environment.
Fort Lauderdale,
Florida USA, it
manages assets
of around $67bn
as at 31 December
2020.
------------------------- ------------------------------ ------------------------- -----------------------
Lomas Capital Lomas is an independent, A thematic approach 9% (Nil at 31 December
Management (2) majority employee that 2019)
owned, boutique does not identify
investment firm with a
with a strong investment-led particular pre-defined
culture. It was style
founded in 2012, of investing.
in New York, and,
as at 31 December
2020, had $1.2bn
assets under management.
------------------------- ------------------------------ ------------------------- -----------------------
Lyrical Asset Management Lyrical Asset Management Looks for US companies 10% (13% at 31
is a boutique advisory in December 2019)
firm based in New cheapest decile
York, with 250 of valuation
clients and discretionary with high returns
assets under management on invested
(AUM) of over $7.6bn capital and ability
as at 31 December to grow
2020. profitability.
------------------------- ------------------------------ ------------------------- -----------------------
Sustainable Growth SGA is based in Seeks differentiated 14% (11% at 31
Advisers (SGA) Stamford, USA and companies that December 2019)
manage US, Global, have strong
Emerging Markets, pricing power,
& International recurring
Large Cap Growth revenue generation
Portfolios. They and long
had client assets runways of growth.
of over $22.3bn
as at 31 December
2020.
------------------------- ------------------------------ ------------------------- -----------------------
Vulcan Value Partners Vulcan is based Focuses on protecting 9% (9% at 31 December
in Birmingham, capital by investing 2019)
USA and was founded in
in 2007. As at companies with
31 December 2020 high quality
it managed $16.7bn business franchises
for a range of trading
clients including at attractive prices.
endowments, foundations,
pension plans and
family offices.
------------------------- ------------------------------ ------------------------- -----------------------
Jupiter Asset Jupiter was established Looks for out-of-favour 7% (10% at 31 December
Management (3) in London in 1985 and 2019)
as a specialist undervalued businesses
investment boutique. with prominent
Since then it has franchises
expanded beyond and sound balance
the UK and manages sheets.
around GBP58.7bn
as at 31 December
2020.
------------------------- ------------------------------ ------------------------- -----------------------
River and Mercantile River and Mercantile Seeks smaller companies 8% (9% at 31 December
Asset Management Group was formed and recovery situations 2019)
in 2014 and is where it can identify
based in London. value at
Its advisory and different stages
investment solutions of a
serve a large client company's lifecycle.
base predominantly
in the UK. As at
31 December 2020
they managed GBP4.6bn.
------------------------- ------------------------------ ------------------------- -----------------------
Veritas Asset Veritas was established Aims to grow real 14% (13% at 31
Management in 2003, and is wealth December 2019)
run with a partnership over five-year
structure and culture. periods by
They have offices researching thematic
in London and Hong trends
Kong. As at 31 that drive medium-term
December 2020 they growth.
managed GBP24.1bn.
------------------------- ------------------------------ ------------------------- -----------------------
*As rated by Willis Towers Watson.
1. FPA's mandate was terminated on 16 October 2020.
2. Appointed 16 October 2020 and terminated 3 February 2021. 3.
'JUPITER' and the Jupiter logo are the trade marks of Jupiter
Investment Management Group Ltd.
HOW WE MANAGE YOUR PORTFOLIO
We have overall responsibility for the management of the
Company's portfolio. We have built and manage a team of diverse,
world-class* Stock Pickers to whom we allocate part of the
portfolio to invest in a bespoke selection of usually 20 or less of
their 'best ideas'.
'Investing For Generations' is a backbone of the philosophy of
the Company. It brings long-term principles into how we invest your
money including environmental, governance and social
considerations. This helps us define our investment approach,
ensuring that the Stock Pickers' thinking and practices are aligned
with the core beliefs of the Company and that they invest
responsibly. We consider this a key factor for long-term success.
Arguably, responsible investing has been brought into sharper focus
during 2020. The changes that the world's organisations,
individuals, societies, governments and corporations will have to
make over the coming years are significant.
HOW WE CHOOSE OUR STOCK PICKERS
We aim to forge abiding partnerships with our Stock Pickers,
enabling them to focus on what they do best. Our Stock Pickers are
focused on the long term and do not necessarily look at volatility
as a risk, but more as an opportunity: to many of them risk is more
associated with the permanent loss of capital. The greater focus on
the long term generally leads to lower turnover than the average
manager. We do not often change Stock Pickers nor are they often
changing stocks.
We invest significant time, research and effort in identifying
Stock Pickers for the Company's portfolio, leveraging our extensive
research network, robust process and expertise. Our approach
involves identifying the skills and characteristics we believe are
essential in good Stock Pickers. We believe the key to identifying
tomorrow's high-performing Stock Pickers lies in extensive due
diligence combined with qualitative and quantitative analysis. This
due diligence focuses on:
-- the investment processes, resources and decision-making that
make up the Stock Picker's competitive advantage;
-- the culture and alignment of the organisation that leads to
sustainability of that competitive advantage;
-- their approach to responsible investment. We expect our Stock
Pickers to have a demonstrable process in place that identifies and
assesses material ESG factors; we aim to appoint Stock Pickers who
actively engage with the companies in which they invest and have an
effective voting policy. When necessary, we engage with the Stock
Pickers and guide them towards better practices; and
-- the operational infrastructure that minimises risk from a
compliance, regulatory and operational perspective.
We do not believe that qualitative or quantitative assessments
on their own provide enough information to give us an advantage in
assessing the potential of a Stock Picker to outperform. Our
Manager Research team formulates a view on each Stock Picker we
seek to rate over a series of meetings with each one. We look
beyond past performance numbers to try to understand what
'competitive edge' each Stock Picker has and whether that edge is
likely to be sustainable in the future. We dig deeper into the
investments made by each Stock Picker using a case study
methodology to understand the depth of fundamental analysis
involved in investment decisions. We look at matters such as the
team's process for selecting stocks, adherence to this process
through different market conditions, relevant team dynamics,
training and experience as well as performance track record. We see
the track record as just a single data point and, without the
context of the additional data we assess, it is unlikely to
persuade us that a Stock Picker is skilled.
Our expectation of success further rises where we engage with
Stock Pickers to structure bespoke high conviction, concentrated
strategies usually of 10 to 20 stocks, at an attractive cost and we
believe portfolios are more robust when we diversify across Stock
Pickers with differing approaches. High active share and
concentrated portfolios are advantageous. Academic research
supports this(1) . The broadest opportunity set is provided by
unrestricted global mandates, to allow skilled Stock Pickers the
widest scope.
*As rated by Willis Towers Watson.
1. For example, Mike Sebastian and Sudhakar Attaluri,
'Conviction in Equity Investing', Journal of Portfolio Management,
Summer 2014.
How we Reduce Risk and Enhance Returns for our Portfolio
PORTFOLIO RISK AND POSITIONING
The Company's portfolio had a level of risk similar to that of
the benchmark. Annualised expected volatility was 19.5% for the
portfolio and 18.5% for the benchmark as at 31 December 2020.
Active Share, a measure of the percentage of stock holdings in a
portfolio that differs from the benchmark, remained in the range of
73% to 80% over the year with active risk* controlled at 2.9% as at
31 December 2020. We have retained a broadly balanced exposure of
manager styles, sectors and markets in 2020 relative to the
benchmark. This is in line with our process and has been an
appropriate method to manage risk, as performance of the different
investment styles, markets and sectors differed significantly in a
particularly volatile year.
During 2020, we did not implement any currency hedging for the
Company. Our reference benchmark is unhedged and our currency
exposure is in line with our country allocations. As part of our
portfolio risk management we monitor and manage country and
currency exposure, aiming not to diverge significantly from the
benchmark allocations. However, we can hedge currency risk as
required, depending on our view of the risk profile.
*Also known as tracking error, active risk is a measure of the
risk in an investment portfolio that is due to active management
decisions made.
GEARING TO ENHANCE RETURNS
The Company has both long-term and short-term facilities for
gearing to allow for greater flexibility. We manage gearing within
a range set by the Board. In 2020, we maintained a gross level of
gearing of between 5.5% and 11.5%. At the start of 2020, we
maintained gearing at the lower end of this range, due to concerns
over the high equity valuations following strong 2019 returns. This
proved beneficial given the collapse in the equity market in the
first quarter of the year. We allowed gearing to increase naturally
with the market sell-off. This meant that gearing stood at a high
of 11.5% when the market started to recover from late March. With
the rebound in the market the gearing level again reduced and,
following the market recovery, we took action to further reduce it
due to the significant level of uncertainty and risk still facing
us.
Towards the latter part of the year, we again adjusted the level
of gearing and brought it back towards 10%, given more clarity
around the outcome of the US election and the positive news
regarding successful vaccine development.
In December we replaced the Company's existing short-term credit
facilities totalling GBP200m, with two new short-term credit
facilities totalling the same amount. The Company's total gearing
level remained unchanged as a result of the new facilities and the
level of gross gearing at the end of the year was 10%.
Risk Summary
------------------------------
Active Risk 2.9%
---------------------- ------
Active Share 77%
---------------------- ------
Beta 1.04
---------------------- ------
Portfolio volatility 19.5%
---------------------- ------
Benchmark volatility 18.5%
---------------------- ------
Number of Companies as at 31 December
2020**
-----------------------------------------
Portfolio 179
------------------------- --------------
Benchmark 2,908
------------------------- --------------
Source: FactSet, BNY Mellon Performance & Risk Analytics
Europe Limited and MSCI Inc.
The Glossary on page 100 of the Annual Report explains the
meaning of the above terms.
**The figures shown in the Number of Companies table above for
Portfolio and Benchmark are different from those used for the
calculation of the corresponding risk analysis. This is due to the
classification of stocks for risk purposes, that we may invest in
more than one class of share in a company and limited data coverage
for certain stocks.
OUTLOOK
Financial markets always face uncertainty but, as we entered
2021, uncertainty and risk remained high. We are still in the
middle of a global pandemic and, despite positive news on the
development and distribution of vaccines, the return to normality
is still beset with challenges, with virus levels, lockdown and
economic policy and vaccine distribution progress varying between
countries.
The outcome of the US elections will cause important short-term
and structural policy shifts. With small majorities in both the
House of Representatives and the Senate, the Democrats are now more
likely to be able to deliver on their policy agenda. Further fiscal
stimulus packages are likely, which should have a significant
impact on the level and speed of economic recovery in the US. From
a structural perspective, potential changes in taxation, especially
corporate taxation, and anti-trust policy are also more likely. Any
potential rise in inflation expectations or significant tax changes
could dramatically affect the style or sectors driving the market.
We also expect the Biden administration to implement
climate-changed focused stimulus policies and now it has rejoined
the Paris Climate Agreement, to bring Federal momentum back to the
pace of decarbonisation.
With a UK-EU trade deal now approved and the UK's separation
from the European Union complete, the uncertainty of a no-deal
Brexit evaporated. Whilst there may be some short-term volatility
as specific details from the new trading relationship emerge, there
should now be a more positive backdrop for future UK growth over
the long term as it negotiates trade deals with its other major
trading partners and develops its productivity strategy.
Since its outbreak in 2020, China has, to date, largely
controlled the pandemic and, therefore, benefitted from a faster
economic recovery. With much of the world still grappling with the
effects of the pandemic, varied approaches to its control and
different paces of vaccine rollout, China appears well positioned
economically. We believe that China offers an attractive investment
opportunity - it accounts for approximately 5% of the MSCI ACWI,
yet it has the second largest economy in the world, around 66% the
size of the US's. The importance of China as a global leader is
likely to grow further over time. The Company's portfolio is
currently slightly overweight to both the UK and China, given the
attractive stock opportunities our Stock Pickers have been able to
uncover there.
With interest rates at close to record lows and governments
prepared to support economies with extensive fiscal measures, we
believe 2021 should be a positive year for equities. As such, the
Company's 100% global equity portfolio, with a risk-managed level
of gearing, is well positioned. However, given the amount of
uncertainty still ahead of us, we believe now is not the time to
take concentrated bets on particular countries, sectors or
investment styles. For that reason, we think it is vital to have a
diversified portfolio which is focused on stock selection rather
than macro factors as its key driver.
Our Approach to Responsible Investment
A core part of our manager research, selection and monitoring
procedure is an assessment of ESG risks and opportunities. We
require our Stock Pickers to have a demonstrable process in place
that identifies and assesses material ESG factors. We expect that
our Stock Pickers will act where they determine an ESG risk is
likely to affect the performance of an investee company and that
this risk is outweighing any potential financial reward. We explore
how our Stock Pickers identify, assess and act on the ESG risks
inherent in their stock selections for the Company, using internal
and external ESG information in order to analyse, monitor and
challenge their approach. When constructing the Company's
portfolio, we review it through a sustainability lens which aims to
measure the portfolio's resilience to ESG risks and long-term
trends that could materially impact it.
Climate-related risk is one of the specific areas that we
consider in relation to the Company's portfolio. In addition to the
analysis carried out by our Stock Pickers when selecting
investments, we monitor the portfolio's climate risk exposures
against its benchmark, both from a top-down and stock-level
perspective. We do this using internal and external data and
models. We continually evolve our research, tools, data and
analysis to enable a robust assessment of risks and
opportunities.
The analysis allows us to evaluate the climate-related risks
within the portfolio and informs our risk management and
discussions with our Stock Pickers. An example of some of the
information we utilise can be seen in the chart below. As at 31
December 2020, the Company's portfolio's carbon footprint is
significantly better than its benchmark. The portfolio has a much
lower exposure to companies owning fossil fuel reserves than the
benchmark.
Both we and the Company believe that effective stewardship
enables us to guide investee companies towards better practices.
However, investors may want to exclude a particular type of
investment. To date, the Company has not placed any ethical or
value-based restrictions on the types of stocks in which our Stock
Pickers can invest and has only imposed limited restrictions. The
Company prohibits investment in armaments made illegal under
international law via the Inhuman Weapons Convention, and those
weapons covered by standalone conventions. It also prohibits
investment in other investment companies. In 2020, as part of its
oversight of the Company's responsible investment activities, the
Board looked at the restrictions the Company currently places on us
and our Stock Pickers. The Board decided not to change or impose
further restrictions, but is keeping this under review and we
anticipate that it may do so if it considers exclusion rather than
engagement may be more effective.
CLIMATE RISK EXPOSURES (tCO2e) AS AT 31 DECEMBER 2020
Alliance MSCI ACWI
Trust portfolio
Carbon Emissions/$M
Invested 71.6 101.0
----------------- ----------
Carbon Intensity 132.7 206.6
----------------- ----------
Weighted Average Carbon
Intensity 99.0 155.3
----------------- ----------
Source: MSCI ESG Research LLC and WTW.
WEIGHT OF HOLDINGS OWNING FOSSIL FUEL RESERVES (%) AS AT 31
DECEMBER 2020
Alliance MSCI ACWI
Trust portfolio
Any Reserves 3.6 5.5
----------------- ----------
Thermal Coal 1.2 1.4
----------------- ----------
Gas 1.2 3.2
----------------- ----------
Oil 1.2 3.2
----------------- ----------
Source: MSCI ESG Research LLC and WTW.
CASE STUDY: EOS AT FEDERATED HERMES (EOS)
Climate Action 100+
Climate Action 100+(1) is an investor-led initiative that
launched in December 2017 to ensure the world's largest corporate
greenhouse gas emitters take necessary action on climate change.
Selected for engagement have been 167 focus companies, accounting
for over 80% of corporate industrial greenhouse gas emissions.
CA100+ oil and gas call on benchmarking methodology
In 2020, EOS and the Climate Action 100+ investor leads had a
multi-stakeholder call with all the major European oil and gas
companies. The attendees ran through the methodology being used to
track companies' progress. Concerns were raised around the boundary
for Scope 3 emissions, and regarding the limitations around actions
that the companies could take in mitigating value chain emissions.
EOS noted the need for an enhanced focus on positive lobbying by
the industry, so that the companies can play a role in the
low-carbon transition. EOS raised concerns around leakage of
emissions from the sector through divestment of assets, and the
need for clear disclosure around the type of capital expenditure
and divestiture. It encouraged greater clarification around the
capital expenditure methodology. Concerns were also raised around
the carbon budget boundary used to measure the alignment of capital
expenditure. Subsequently, EOS had a call with investors to discuss
feedback around the benchmarking methodology. It emphasised the
need for alignment of capital expenditure with the goals of the
Paris Agreement to take a dominant role within the methodology, as
it could apply to multiple different strategies. EOS expects this
to be core to the methodology, with supplementary assessment
criteria for those companies looking to transition. EOS also
encouraged greater clarification around Scope 3 boundaries and a
need for more specificity on the expectations for a Just
Transition.
1. EOS along with our manager Jupiter are signatories of Climate
Action 100+ (https://www.climateaction100.org/) and are responsible
for direct engagement with companies, which include names like BP,
Heidelberg Cement and Suncor.
EFFECTIVE STEWARDSHIP
One of the key relationships for the Company's portfolio is the
work WTW and the Stock Pickers do with EOS, a leading stewardship
provider with a focus on achieving positive change and helping
investors meet their fiduciary responsibilities. EOS share their
expertise and provide voting recommendations to our Stock Pickers
and engage with the companies within the portfolio. Their influence
and scale, representing $1.3tr of assets under advice(1) , provides
significant leverage during their engagement activities. Examples
of some of EOS's engagement activities in relation to investments
held within the Company's portfolio are detailed on pages 25 to 29
of the Annual Report.
WTW ENGAGEMENT WITH OUR STOCK PICKERS
In addition to EOS's stewardship activities, we also expect our
Stock Pickers to be good stewards of their capital and assessing a
manager's credentials and activities in this space is an integral
part of our manager research, selection and monitoring process. We
aim to appoint Stock Pickers for the Company who actively engage
with the companies in which they invest and have an effective
voting policy. When necessary, we engage with the Stock Pickers and
guide them towards better practices.
We believe corporate culture is a key element to a Stock
Picker's long-term success, and cognitive diversity, through the
inclusion of people with different ways of thinking, viewpoints and
skillsets within a team, enhances that success. Although we
acknowledge that the investment industry has a long way to go to
improve in this space, we actively encourage our Stock Pickers to
act.
In addition to engaging with the Stock Pickers, we take a strong
and engaged approach to the investment industry, helping to shape
it for the benefit of all participants through our collaborative
initiatives such as the Thinking Ahead Institute and being a member
of Climate Wise(2) , Transition Pathway Initiative(3) and one of
the founding members of the Diversity Project(4) , among many
others.
To ensure that we 'walk the walk', within WTW we have many
initiatives aimed at enhancing our culture, sense of purpose and
improving on the inclusion and diversity within our teams. It's
fundamental to everything we do: how we hire, promote and develop
colleagues, how we work with clients and asset managers and how our
teams function.
1. As of 31 December 2020. 2. www.climate-wise.com 3.
www.transitionpathwayinitiative.org 4. www.diversityproject.com
VOTING
The Company's Stock Pickers exercise the voting rights in
respect of the stocks in which they have invested for the Company.
The Stock Pickers voted on all voteable proposals over the year.
They cast votes on 3,016 proposals at company meetings. Of these,
they voted against company management or abstained from voting on
300. Of the votes against management, the key issues voted on were
around remuneration and directors-related topics.
VOTING SUMMARY
Number of votes exercised with management
on each topic 90.1%
Number of eligible votes exercised that were
against management 9.1%
------
Number of eligible votes that were abstentions 0.8%
------
Source: WTW.
ELIGIBLE VOTES EXERCISED THAT WERE AGAINST MANAGEMENT
Director Related 31.2%
Non-Salary Comp 27.6%
------
Capitalisation 14.2%
------
Routine/Business 6.2%
------
Shareholder - Director Related 6.2%
------
Shareholder - Other/Miscellaneous 5.1%
------
Shareholder - Routine/Business 3.3%
------
Shareholder - Social Proposal 2.2%
------
Shareholder - Corporate Governance 1.8%
------
Shareholder - Health/Environment 1.1%
------
Shareholder - Compensation 0.7%
------
Shareholder - Social/Human Rights 0.4%
------
Note: vote categories starting with 'Shareholder' indicate
resolutions brought forward by shareholders. As such 'Shareholder -
Director Related', indicates a shareholder proposal on director
related matters. Source: WTW.
CASE STUDY: EOS AT FEDERATED HERMES
To provide some context of the type of discussions EOS are
involved in, we illustrate below two case studies which
demonstrates EOS's collective bargaining power and how, over
several years, it can influence companies to bring about positive
change.
Alphabet
In April 2018, EOS began engaging with Alphabet on how its
technologies manage the prioritised content of Google Search and
YouTube to avoid human rights concerns arising through the
application of AI. It encouraged the company to go beyond
publishing AI principles and to demonstrate how the principles are
being applied.
After multiple touchpoints it stepped up its engagement,
including writing to the chair of the board, asking for further
disclosure on content governance and recommending a feedback system
in its AI ecosystem. At the 2019 annual stockholder meeting, in
addition to supporting one of the shareholder proposals aimed at
better addressing societal risks, EOS voiced their concerns
relating to AI governance directly to the executives and board.
With regard to their request for demonstration of how the AI
principles are being applied, in January 2019 the company published
a 30-page white paper on AI governance. In January and February
2019, YouTube took a series of actions to improve transparency and
accountability. Since 2019, the company has made improvements to
tools to measure fairness, transparency and explicability of AI
which also helped satisfy EOS's request. It has also improved
stakeholder engagement and communications with regard to how AI
social impact is assessed and measured. In November 2020, Alphabet
changed its audit committee to become an audit and compliance
committee (ACC). The ACC's charter now includes sustainability,
data privacy and civil and human rights risks as items which must
be reviewed by it - becoming closer to meeting EOS's request for
enhanced board oversight. EOS continue to engage with the company
through a human rights lens to encourage board accountability over
the responsible use of AI.
Taiwan Semiconductor Manufacturing Company (TSMC)
In 2018, EOS encouraged TSMC to take a leadership position on
ensuring broader access to water. The company's fabrication
facilities consume a lot of water and Taiwan is exposed to a
growing drought risk due to climate change. EOS outlined how the
company could play a role in sustainable development by improving
water stewardship. TSMC allocated significant resources to develop
the know-how to support its ambition of using reclaimed water in
fabrication operations. It started a pilot project and promised to
share the knowledge with the government and peers. Its intellectual
property data allowed EOS to gain deeper insights into its
progress. It engaged with the executive committee sponsor of the
sustainability initiative and the former CFO to ensure further
development. Smart measurement systems are now in place. Recycled
water with improved quality can replace the demand for city water,
contributing to a more sustainable society. The company recycles
133.6 million metric tons of water annually, a saving of around
NT$1,613.2m (US$53.8m). In 2019, TSMC achieved the highest score
ever recorded by the Alliance for Water Stewardship and its current
recycling rate is 86.7%. EOS continues to monitor its progress.
EOS'S ENGAGEMENT ACTIVITIES
During 2020, EOS has engaged on a range of 497 ESG issues and
objectives with 108 companies held by the Company. Of the 223
specific engagement objectives, EOS discussed with the companies
during the period, it recorded progress on 50% using its milestone
measurement system.
As part of their engagement on climate change, including their
role in the Climate Action 100+ (CA100+) collaborative engagement
initiative referred to on page 25 of the Annual Report, EOS raised
questions at the annual general meetings (AGMs) of seven
companies.
We commented on engagement with BP in the Company's previous
Annual Report. It is worth noting that since then BP has restated
its business purpose supported by revised longterm aims and
targets. BP's purpose is now: "Our purpose is reimagining energy
for people and the planet. We want to help the world reach net --
zero and improve people's lives." The Company has set a new
ambition to become a net zero company by 2050 or sooner, and to
help the world get to net zero. This illustrates that collaborative
engagement can have an impact. Investors need to continue to work
with the companies in which they invest. It is through this
collaboration and engagement that progress can be made. Many oil
and gas companies are part of the solution. Demand for gas or oil
is not going to disappear overnight and pure divestment would
potentially shift greater power towards more opaque state-owned
institutions, many of which are less exposed and responsive to
investor pressures. In some situations divestment will make sense.
The Board is constantly evolving and evaluating the best approach
for the Company. The critical point is that all the companies
within the portfolio are in the top 10 to 20 stock picks of our
Stock Pickers and that each incorporates sustainability risks in
their analysis.
In addition to the engagement with the oil and gas majors and
the biggest carbon emitters, investors also stepped up their calls
for banks to align their policies with the Paris Agreement goals to
phase out the financing of fossil fuels. At the Barclays Bank AGM
there were two climate -- related resolutions. The first committed
the bank to aligning its financing activities with the Paris
Agreement and achieving net -- zero emissions by 2050 and was put
forward by the bank after intensive engagement by investors and
their representatives, including EOS. The second, which went
further, calling for a 'phase out' of financing for fossil fuels
and utility companies that are not aligned with the Paris Agreement
climate goals, was backed by ShareAction, a charity that advocates
for responsible investment.
One of our Stock Pickers, Jupiter, which has invested in
Barclays shares for the Company, voted in favour of both the
management-backed resolution and ShareAction's more ambitious
resolution as it believed the more stringent approach proposed by
ShareAction promoted better management of ESG risks and
opportunities.
The company -- backed resolution passed with almost unanimous
support. ShareAction's resolution was supported by 24% of the
investor base.
MANAGER ENGAGEMENT
In addition to the engagement work done by EOS, our Stock
Pickers engage with their investee companies on various ESG-related
topics. Below we provide two examples of engagement by our Stock
Pickers:
Sonic Healthcare
Sonic Healthcare is an Australian company that provides
laboratory, radiology and pathology services in eight countries. A
large part of the business is diagnostics which involve samples
being collected and analysed and the results emailed to
physicians.
During the second quarter of the year our Stock Picker engaged
with Sonic Healthcare over allegations made against one of its UK
operations, The Doctors Laboratory (TDL). This related to wrongful
dismissal and whether couriers had been provided with adequate
personal protective equipment (PPE) while making
collections/deliveries during Covid-19. The dialogue also covered
the working contracts given to its employees. TDL has offered all
its couriers a full employment contract with full employee status
and at rates that are at the top achieved in the UK market.
The company has always been able to recruit new couriers and has
low attrition rates as a consequence. Our Stock Picker was
reassured that adequate PPE had been provided. The company provided
in writing assurances that the Director of Health and Safety
continually monitors all regulation and guidelines on Covid-19.
Heidelberg Cement
Our Stock Picker had noticed that Heidelberg Cement had no
mention of the Task Force on Climate-related Financial Disclosures
(TCFD) on its website up until it released its capital markets day
slides in early September 2020. It mentioned in these slides that
it has a 'clear commitment to TCFD compliant reporting'. Seeking to
understand the company's position, the Stock Picker arranged a call
and asked the company to clarify. Heidelberg currently is not an
official endorser of the TCFD, but its practices and policies seem
consistent with the TCFD's recommendations. For the past several
years, Heidelberg had been working on aligning with the TCFD.
However, it did not want to sign on until it had all of its
processes in place. It will be officially endorsing in the near
future.
ENGAGEMENT CASE STUDY: EOS AT FEDERATED HERMES
The Coronavirus and the race for a vaccine
It has been encouraging to see the Pharmaceutical and Healthcare
sector leap into action, searching for treatments and vaccines for
Covid-19. Despite this, EOS remain concerned about the lack of
commitment and action across the industry to act ethically to
ensure safety and efficacy, as well as equitable access. It is
engaging with pharmaceutical companies to ensure they consider a
global access approach. It has been particularly concerned about
early actors setting a precedent by limiting the initial supply of
treatments within certain country borders. It wishes to ensure that
companies consider new and innovative mechanisms to assess
country-specific needs and equal distribution while preventing
stockpiling. Companies and health authorities will also need to
rapidly expand manufacturing while ensuring product quality and
safety and considering innovative methods such as patent
sharing.
EOS have seen from engagement that the most successful models
for addressing global health challenges involve multi-stakeholder
partnerships. These should include pricing flexibility from
pharmaceutical companies, investment in health spending by
governments, guidance and coordination from bilateral and
multilateral organisations, and education about vaccination
programmes and distribution, with assistance from NGOs. The
challenge on which EOS will continue to engage is ensuring that the
current momentum around access to vaccines for infectious diseases
continues.
Costs, Discount and Share Buybacks
COSTS
The Company's Ongoing Charges Ratio (OCR) was 0.64% (2019:
0.62%). Total administrative expenses were GBP6.0m, a small
increase from 2019 when they were GBP5.9m. Investment management
expenses were GBP12.0m (2019: GBP11.7m). The main contributor to
the increase in the OCR is higher expenditure on investor relations
and marketing.
The Company incurred one-off costs for the year of GBP0.4m
(2019: GBP0.7m). These included GBP0.2m of property matters which
are not connected to the ongoing investment business of the Company
and GBP0.2m of non-recurring legal fees for tax-related
matters.
The Board has a policy of adopting a one quarter revenue and
three quarters capital allocation for management fees, financing
costs and other indirect expenses where this is consistent with the
AIC Statement of Recommended Practice: Financial Statements of
Investment Trust Companies and Venture Capital Trusts.
DISCOUNT AND SHARE BUYBACKS
The discount remained stable for most of the year except for a
short period in March and early April when markets fell sharply and
it swung between 2.5% and 17.6%. The discount at 31 December 2020
was 3.5% (2019: 4.1%) and the average for the year was 5.6% (2019:
5.0%).
From the end of May until the middle of October the Company
bought back shares. In that period the Company purchased 7,468,052
shares adding GBP1.6m to the Net Asset Value for remaining
shareholders. The total cost of the share buybacks was GBP59.8m.
The weighted average discount of shares bought back in the year was
6.0%. All the shares bought back were cancelled.
Share buybacks, combined with the effect of the change in the
discount, contributed a total of 0.1% to our performance in the
year.
The Board will continue to monitor the stability of the discount
and will take advantage of any significant widening of the discount
to produce additional return for shareholders.
ONGOING CHARGES AND TOTAL EXPENSE RATIOS (%)
Year Ongoing Total
Charges Expense
Ratio Ratio
2016 0.43 0.54
--------- ---------
2017 0.54 0.58
--------- ---------
2018 0.65 0.68
--------- ---------
2019 0.62 0.66
--------- ---------
2020 0.64 0.65
--------- ---------
Source: Alliance Trust and FactSet.
An explanation of how these ratios are calculated can be found
on page 101 of the Annual Report. For years prior to 2019 the OCR
is calculated using the average of the opening and closing NAV for
the year. The OCR for 2019 and 2020 is calculated using the average
daily NAV.
TOTAL EXPENSES (GBPM)
2016 16.8
2017 17.4
-----
2018 17.4
-----
2019 17.6
-----
2020 18.0
-----
Source: Alliance Trust and FactSet.
DISCOUNT AND SHARE BUYBACKS (2020)
Month Average Share
Discount Buyback
(%) (000's)
Jan 4.8 -
---------- ---------
Feb 4.7 -
---------- ---------
Mar 8.7 -
---------- ---------
Apr 5.0 -
---------- ---------
May 5.7 3,279
---------- ---------
Jun 5.9 14,249
---------- ---------
Jul 6.0 10,857
---------- ---------
Aug 6.0 4,431
---------- ---------
Sep 6.2 22,348
---------- ---------
Oct 5.5 4,605
---------- ---------
Nov 4.4 -
---------- ---------
Dec 4.0 -
---------- ---------
Source: Bloomberg and Morningstar.
Dividend
DIVID POLICY
Since 2006, the Company has paid quarterly interim dividends on
or around the ends of June, September, December and March. The
final quarterly interim dividend is paid prior to the Company's
Annual General Meeting which takes place in April or May. This
means that shareholders have certainty of the date on which they
will receive their income but are not asked to approve the final
dividend. At last year's AGM, shareholders were given an
opportunity to share their views on the Company's dividend as they
were asked to approve the Company's dividend policy. This year, and
in following years, we will similarly ask our shareholders to
endorse this policy:
Subject to market conditions and the Company's performance,
financial position and outlook, the Board will seek to pay a
dividend that increases year on year. The Company expects to pay
four interim dividends per year, on or around the last day of June,
September, December and March, and will not, generally, pay a final
dividend for a particular financial year.
In determining the level of future dividends, the Board will
take into account factors such as any anticipated increase or
decrease in dividend cover, projected income, inflation and yield
on similar investment trusts.
The Board will seek to use the income from investments to
satisfy its dividend payments, but may also, when this income is
insufficient, use part of the Company's distributable reserves. In
addition, should there be a year in which income is unexpectedly
high, some of that income, but not more than 15%, may be retained
in the distributable reserves or a special dividend may be
declared.
DISTRIBUTABLE RESERVES
The Company has GBP99.2m (2019: GBP109.2m) of revenue reserves
and a further GBP2.2bn (2019: GBP2.1bn) of capital reserves that
can be distributed. With a reduced level of income this year due to
investee companies cutting the level of their dividends or not
paying dividends at all, the Company used GBP10.0m of its revenue
reserves to meet the cost of the dividend in 2020.
The Company also has a merger reserve (GBP645.3m) which cannot
presently be used for payment of dividends. Last year, the Board
was proposing to ask shareholders to approve its conversion into a
distributable reserve. This is a process which requires shareholder
and Court approval but, due to the impact of Covid-19 on the Court
system, the Board decided to withdraw the proposal from last year's
AGM and to include it for shareholders' approval at the AGM in
April 2021.
If approved by shareholders and the Court, the Board has no
intention of making immediate use of the funds currently forming
the merger reserve. The proposal is being recommended as a means of
providing additional flexibility in the future.
In terms of process, the merger reserve would have to be
capitalised and a share issue declared. This is a technical step
and would not require any shares to be physically issued. These
shares would then be cancelled with Court approval. Once approved
by shareholders, a Court hearing would then take place. Assuming
the approval of the Court is given (a process expected to take 10
weeks), the merger reserve would then be converted into a reserve
that could be distributed.
The process will not reduce the total capital of the Company
but, if approved, will increase the proportion of the Company's
reserves capable of being distributed in the future. Details of the
Company's reserves can be found on page 76 of the Annual
Report.
DIVID DECLARATION
The Ordinary Dividend for 2020 will increase by 3% to 14.38p. A
fourth interim dividend of 3.595p will be paid on 31 March 2021 to
shareholders who are on the register on 12 March 2021. The payment
dates for the 2021 financial year can be found on page 104 of the
Annual Report.
RESPONSIBILITY STATEMENT
The Directors confirm to the best of their knowledge:
The financial statements have been prepared in accordance with
the applicable set of accounting standards and give a true and fair
view of the assets, liabilities, financial position and profit and
loss of the Company.
The Annual Report includes a fair review of the development and
performance of the business and the financial position of the
Company, together with a description of the principal risks and
uncertainties that they face.
That the Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Company's position, business model and
strategy.
Gregor Stewart
Chairman
3 March 2021
Statement of comprehensive income for the year ended 31 December 2020
--------------------------------------------------------------------------------------------------
Year to 31 December
2020 Year to 31 December 2019
--------------------------------- ------------------------------ ------------------------------
GBP000 Revenue Capital Total Revenue Capital Total
--------------------------------- -------- --------- --------- -------- --------- ---------
Income 46,244 - 46,244 60,814 - 60,814
Change in the fair value
through profit or loss - 230,268 230,268 - 536,228 536,228
Loss on fair value of debt - (13,142) (13,142) - (15,317) (15,317)
---------------------------------- -------- --------- --------- -------- --------- ---------
Total revenue 46,244 217,126 263,370 60,814 520,911 581,725
---------------------------------- -------- --------- --------- -------- --------- ---------
Investment management fees (2,991) (8,973) (11,964) (2,931) (8,794) (11,725)
Administrative expenses (5,227) (762) (5,989) (4,893) (969) (5,862)
Finance costs (1,798) (5,322) (7,120) (1,810) (5,456) (7,266)
Impairment on asset held
for sale - - - - (56) (56)
Foreign exchange losses - (8,378) (8,378) - (3,926) (3,926)
---------------------------------- -------- --------- --------- -------- --------- ---------
Profit before tax 36,228 193,691 229,919 51,180 501,710 552,890
Taxation 147 - 147 (3,946) - (3,946)
---------------------------------- -------- --------- --------- -------- --------- ---------
Profit for the year 36,375 193,691 230,066 47,234 501,710 548,944
---------------------------------- -------- --------- --------- -------- --------- ---------
All profit for the year is attributable
to equity holders.
------------------------------------------------------- --------- -------- --------- ---------
Earnings per share attributable
to equity holders
Basic (p per share) 11.16 59.42 70.58 14.30 151.84 166.14
Diluted (p per share) 11.16 59.40 70.56 14.28 151.68 165.96
The Company does not have any other comprehensive income and
hence profit for the year, as disclosed above, is the same as the
Company's total comprehensive income.
Statement of changes in equity for the year ended 31 December 2020
--------------------------------------------------------------------------------------------------
Share Capital Merger
capital redemption reserve Capital Revenue Total
GBP000 reserve reserve reserve Equity
--------------------------- --------- ------------ --------- ---------- --------- ----------
At 1 January 2019 8,342 10,656 645,335 1,639,172 107,684 2,411,189
Total Comprehensive
income:
Profit for the year - - - 501,710 47,234 548,944
Transactions with owners,
recorded directly to
equity:
Ordinary dividend paid - - - - (45,754) (45,754)
Own shares purchased (115) 115 - (34,987) - (34,987)
--------------------------- --------- ------------ --------- ---------- --------- ----------
At 31 December 2019 8,227 10,771 645,335 2,105,895 109,164 2,879,392
--------------------------- --------- ------------ --------- ---------- --------- ----------
Total Comprehensive
income
Profit for the year - - - 193,691 36,375 230,066
Transactions with owners,
recorded directly to
equity:
Ordinary dividend paid - - - - (46,514) (46,514)
Unclaimed dividends
returned - - - - 149 149
Own shares purchased (187) 187 - (59,793) - (59,793)
At 31 December 2020 8,040 10,958 645,335 2,239,793 99,174 3,003,300
--------------------------- --------- ------------ --------- ---------- --------- ----------
Balance sheet as at 31 December 2020
--------------------------------------------------------------------------
GBP000 2020 2019
------------------------------------------ ------------- ------------
Non--current assets
Investments held at fair value 3,269,556 3,050,010
Right of use asset 594 797
3,270,150 3,050,807
Current assets
Outstanding settlements and
other receivables 25,357 13,409
Cash and cash equivalents 112,730 97,486
138,087 110,895
Total assets 3,408,237 3,161,702
Current liabilities
Outstanding settlements and
other payables (49,397) (19,661)
Bank loans (145,000) (65,000)
Lease liability (228) (251)
--------------------------------------------- ------------- ------------
(194,625) (84,912)
Total assets less current
liabilities 3,213,612 3,076,790
Non--current liabilities
Unsecured fixed rate loan
notes held at fair value (209,780) (196,638)
Lease liability (532) (760)
(210,312) (197,398)
Net assets 3,003,300 2,879,392
Equity
Share capital 8,040 8,227
Capital redemption reserve 10,958 10,771
Merger reserve 645,335 645,335
Capital reserve 2,239,793 2,105,895
Revenue reserve 99,174 109,164
--------------------------------------------- ------------- ------------
Total Equity 3,003,300 2,879,392
All net assets are attributable to equity holders.
Net Asset Value per ordinary share attributable to equity holders
Basic (GBP) GBP9.34 GBP8.76
Diluted (GBP) GBP9.34 GBP8.75
Cash flow statement for the year ended 31 December 2020
---------------------------------------------------------------------
GBP000 2020 2019
------------------------------------------- --------- ---------
Cash flows from operating activities
Profit before tax 229,919 552,890
Adjustments for:
Gains on investments (230,268) (536,228)
Losses on fair value of debt 13,142 15,317
Foreign exchange losses 8,378 3,926
Depreciation 203 187
Impairment on asset held for sale - 56
Finance costs 7,120 7,266
Scrip dividends (279) (350)
Operating cash flows before movements
in working capital 28,215 43,064
Decrease in receivables 887 6,399
Decrease in payables (1,318) (4,206)
----------------------------------------------- --------- ---------
Net cash inflow from operating activities
before income tax 27,784 45,257
Taxes paid (3,652) (1,539)
----------------------------------------------- --------- ---------
Net cash inflow from operating activities 24,132 43,718
Cash flows from investing activities
Proceeds on disposal at fair value
of investments through profit and
loss 2,878,460 1,691,941
Purchases of fair value through
profit and loss investments (2,845,677) (1,627,201)
Disposal of asset held for sale - 2,699
Net cash inflow from investing activities 32,783 67,439
Cash flows from financing activities
Dividends paid -- Equity (46,514) (45,754)
Unclaimed dividends returned 149 -
Purchase of own shares (59,793) (34,987)
Net drawdown of bank debt 80,000 -
Net repayment of bank debt - (2,000)
Principal paid on lease liabilities (251) (271)
Interest paid on lease liabilities (31) (37)
Finance costs paid (6,853) (7,864)
------------------------------------------ -------- --------
Net cash outflow from financing
activities (33,293) (90,913)
Net cash increase in cash and cash
equivalents 23,622 20,244
Cash and cash equivalents at beginning
of year 97,486 81,168
Effect of foreign exchange rate
changes (8,378) (3,926)
-------------------------------------------- ------- -------
Cash and cash equivalents at end
of year 112,730 97,486
The financial information set out above does not constitute the
Company's statutory financial statements for the years ended 31
December 2020 or 2019, but is derived from those financial
statements. Statutory accounts for 2019 have been delivered to the
Registrar of Companies and those for 2020 will be delivered
following the Company's annual general meeting. The auditors have
reported on those accounts; their reports were unqualified, did not
draw attention to any matters by way of emphasis without qualifying
their report and did not contain statements under s498(2) or (3)
Companies Act 2006.
The same accounting policies, presentations and methods of
computation are followed in these financial statements as were
applied in the Company's last annual audited financial statements,
other than those stated in the Annual Report.
Basis of accounting
While the financial information included in this preliminary
announcement has been prepared in accordance with the recognition
and measurement criteria of International Financial Reporting
Standards (IFRSs), this announcement does not itself contain
sufficient information to comply with IFRSs. The Company will
publish full financial statements that comply with IFRSs on its
website.
1. Income
An analysis of the Company's revenue is as follows:
GBP000 2020 2019
----------------------------- ------- -------
Income from investments
Listed dividends -- UK 7,511 14,542
Listed dividends -- Overseas 38,041 44,127
45,552 58,669
----------------------------- ------- -------
Other income
Property rental income 318 324
Mineral rights income* 20 974
Other interest 246 764
Other income 108 83
------------------------------- ------- -------
692 2,145
----------------------------- ------- -------
Total income 46,244 60,814
------------------------------- ------- -------
*The mineral rights income disclosed above represents gross
income received. Against this the Company paid associated expenses
of GBP12k (GBP243k), with US tax of 20% payable on the net
income.
2. Total Company expenses of GBP17,953k (GBP17,587k) consist of
investment management fees of GBP11,964k (GBP11,725k) and
administrative expenses of GBP5,989k (GBP5,862k). Administrative
expenses include non-recurring administrative expenses of GBP394k
(GBP733k).
3. The diluted earnings per share is calculated using the
weighted average number of ordinary shares, which includes 22,331
(334,182) shares held in a trust that was set up to satisfy awards
made under historic share award schemes. The basic earnings per
share is calculated by excluding these shares. The basic Net Asset
Value per share calculation also excludes these shares.
4. All expenses are accounted for on an accruals basis. Where
there is a connection with the maintenance or enhancement of the
value of the Company's investments and it is consistent with the
AIC SORP, the Company is attributing indirect expenditure including
management fees and finance costs, 25% to revenue and 75% to
capital profits. Specific exceptions to this general principle
are:
-- Expenses which are incidental to the disposal of an
investment are deducted from the disposal proceeds of that
investment.
-- Expenses which under the AIC SORP are chargeable to revenue
profits are recorded directly to revenue.
Expenses connected with rental income and mineral rights income
are included as administrative expenses.
5. Investments in subsidiary companies (Level 3) are valued in
the Company's accounts at GBP34k (GBP73k).
On 28 June 2019 the sale of Alliance Trust Savings to
Interactive Investor Limited was completed. The total consideration
payable for the business was GBP40m which included the Company's
office premises at 8 West Marketgait, Dundee, and was subject to
post completion adjustments.
ANNUAL REPORT
The Annual Report will be available in due course on the
Company's website www.alliancetrust.co.uk. It will also be made
available to the public at the Company's registered office, River
Court, 5 West Victoria Dock Road, Dundee DD1 3JT and at the offices
of the Company's Registrar, Computershare Investor Services PLC,
Edinburgh House, 4 North St Andrew Street, Edinburgh EH2 1HJ after
publication. Due to Covid-19 restrictions these offices may not
currently be open or may have restricted opening hours.
In addition to the full annual report, up-to-date performance
data, details of new initiatives and other information about the
Company can be found on the Company's website.
ANNUAL GENERAL MEETING
The 133rd Annual General Meeting of the Company will be held at
11am on Thursday 22 April 2021 at the Company's office at River
Court, 5 West Victoria Dock Road, Dundee, DD1 3JT. Due to the
continuing restrictions and concerns about public health,
attendance will be restricted to only a limited number of Board
members and representatives from the Company. Shareholders are
recommended to lodge proxies for their votes before the meeting.
The Notice of Meeting, detailing the business of the meeting, is
sent to all shareholders. We will post any updates to our meeting
arrangements on our website.
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END
FR DKNBKCBKDFNK
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