New shoes for trust’s entrepreneurs

ATI, Alliance Trust’s “sexy and exciting” range of Oeics launched in the wake of the financial crisis, is gaining strength despite its modest initial performance, writes Shaun Cumming.

Alliance Trust, launched in 1888, is one of Britain’s best known and longest-running investment trusts. In 2009 its management decided it would build on the firm’s success and longevity by creating a standalone range of Oeic funds for the British retail market. In the wake of the financial crisis, and with plenty of competition, this was not easy.

Alliance Trust Asset Management – recently rebranded Alliance Trust Investments (ATI) – was launched by Alliance Trust senior management. Backed with capital from its parent, the new entity’s next steps were to build an investment team and create brand awareness.

Edward Troughton, a managing director of ATI, knew that finding key personnel for a new group is usually ­difficult. But he says: “We have been incredibly successful in attracting some top talent. They came for a number of reasons, but mostly because at ATI they would be able to run a quick, nimble, and smart set-up, which is strongly backed by Alliance Trust PLC. We allow them to do what they have always wanted to do in their careers, which is to build a really successful alpha-driven fund management business.”

Troughton adds that recruiting well-respected fund managers, such as Rod Davidson and his team from Swip [Scottish Widows Investment Partnership] and Llario Di Bon from Fidelity, has helped establish ATI’s plans to be an individual, people-run boutique. Fund managers who join the firm are allowed free rein to run what he calls a “series of entrepreneurial businesses”. (Focus continues below)

“All of these people have 20 years’ or more experience of managing equities. This is very exciting,” he says.

The first goal was to put Alliance Trust’s established skills to good use in ATI.

Troughton says: “The rationale for ATI came from Katherine Garrett-Cox, our chief investment officer and chief executive. She was the chief investment officer of Alliance Trust and talked to the board about the idea of running this third-party asset management firm. She brought me in at the beginning of 2008. We organised all the regulation and built a sales support team ready to launch in 2009.

“When we launched, we thought some of our strongest areas [from the trust] were North American equities and UK equities. But now that has grown into a comprehensive range of six equity funds and one fixed income. We decided the range would be Oeic based, UK and open-ended. With all the turbulence in Europe, we think it is well placed.

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“These things take time. This is not a flash in the pan. It will take some time to do it, but we are wearing out a lot of shoe leather to make sure people understand who we are, what we do, and what we can offer.”

The range, which Troughton calls “sexy and exciting”, includes Asia Pacific Equity, European Equity, Global Thematic Opportunities, Japan Equity, North American Equity, and UK Equity Income. There is also the Monthly Income Bond fund.

One of the group’s original funds was UK Equity Income, which is co-managed by Neil Tong and Kenneth Warnock. Among this £45m fund’s holdings are FTSE 100 firms such as BP and HSBC.

The latest product to join the ATI range is the Global Thematic Opportunities fund, launched in December, which is co-managed by Di Bon and Juergen Lanzer. Their aim is to target global growth through a process of unconstrained, long-term investing.

This was an important area for ATI, and Troughton says that with the leadership of Di Bon, who is also the firm’s head of global equities, it is an exciting area. However, he admits it took some time for the firm to decide exactly what it wanted from the space.

“When we figured it out, we hired Di Bon,” he says. “He has a very interesting way of managing money. The two starting points for him are unconstrained and long-term. As a house, we tend to take a very long-term view. This was unfashionable five years ago, when everyone was looking for the next big thing.”

The firm’s long-term views do not necessarily mean the length of time stocks are held, Troughton says, although in some cases they might. It is more a case of identifying the long-term trends in the market, he says. “We like to see what ’the street’ hasn’t picked up on. We need to keep an eye on risk, but while the global economy might not be so rosy, there is always the chance to pick up good opportunities.”

The firm places an emphasis on risk management, which it sees as a dynamic process. George Renouf, ATI’s head of strategy and risk, is responsible for this aspect. Risk profiles are built on each of the firm’s funds.

The firm has picked up on four long-term global trends, based on Di Bon’s views. “These are demographics, innovation, environment, and global realignment – which is the shift from west to east,”says Troughton.

Using Indonesia as an example, he says there are ways the firm likes to play rising prosperity among many people, who are increasingly economically active. “In places like Indonesia, where the middle class is rising fast, banking is becoming important.”

The environment, according to Troughton, is becoming increasingly important because of the scarcity of basic resources such as water. “When you have a rising population and a scarcity of water, matched with the fact that food production is not keeping up with consumption, we need to look at this theme and decide what to do,” he says.

”This is not a flash in the pan. We are wearing out a lot of shoe leather to make sure people understand who we are”

“But then if you look at China, for example, they have done very well and, quite frankly, are eating a lot more beefburgers. The trade-off is that diabetes is going up at a pace. Where do we get the extra insulin from? Taking a long-term view of these kinds of issues, we believe we can get good returns.”

With the global equity space covered, the firm was also keen to fill the fixed income sector, which Troughton sees as an important investor requirement.

“Another catalyst [for expansion] was fixed income, which I think is a really interesting area. We took four senior managers from Swip in 2010 and launched the Monthly Income Bond fund in June 2010.

“While the UK corporate bond sector has been sick, this fund took a very large percentage of the market last year. The reason for this is the four managers have a combined total of over 90 years of experience.”

Gareth Quantrill and Stuart Steven, the co-managers of the fund, invest in a globally diversified portfolio of positions made up of investment grade sterling corporate bonds, government bonds, non-sterling grade corporate bonds and derivatives.

But the fund’s first-year performance was weak. It was ranked 82 out of 87 funds in its sector, returning 0.59% to February 3, 2012, according to Morningstar. “The biggest cry at the moment is income, but not income at all costs,” says Troughton. “[The managers] believe they can get a yield of 6%, but not to the detriment of quality, which is an important point. The average rating [of the holdings] is single A. The fund has the ability to go short duration. It has the ability to protect [capital] if rates go up.”

There is speculation that the firm may be looking to launch more income funds. Troughton neither confirms nor denies it, but says “there are always ideas”. He adds: “What I do not want to end up with is a company with two pages in the Financial Times with lots of different funds. It has to be targeted and has to be a solution. We are looking at areas such as targeted return, absolute return, and unconstrained. [These] seem to be the words on the street.”

He adds: “We are working closely with clients to design something we will come to the market with by the end of the year. Part of my job is to make sure ideas come through the right places and are well discussed.”

Troughton is critical of the asset management culture where funds are launched to capture areas of fast-growing popularity, saying his firm prefers to deliver on what it already has. “I find the industry has been poor in terms of getting the latest fad and pushing it down the market’s throat – and I don’t think we should get sucked into that,” he says.

With the retail distribution review (RDR) approaching, Troughton says the industry still has some important steps to take to improve its image. To make sure ATI is ready for RDR, it was designed with fees at attractive levels.

“The fund management industry provides an extraordinarily good service. It funnels capital – people’s savings – into the market efficiently,” says Troughton. “However, it has opaque fees. The institutional market is a very good place to look because it is driven by economies of scale. Some fund managers are clinging on to 1.5%, arguing it shouldn’t go down. I am convinced it can go down and should go down.

“We launched our retail funds at 1.2% and put a performance fee on top. We believe it is the fair way to do it. If we don’t perform well we don’t get the fee. [Also], if we don’t outperform we don’t sell. Under RDR, rates will come down even further.”

Despite the rebranding, which clearly distinguishes it from the Alliance Trust, ATI still might have a way to go to solidify its position as a standalone retail brand.

Nevertheless, industry commentators are aware of what the firm stands for. Tim Cockerill, the head of collectives research at Rowan Dartington, says: “I did have a look early on. My impression is that they are conservative, long term, and mainstream.”

Others say Alliance Trust, with its history and track record, is not a bad name to be associated with. Gavin Haynes, the managing director of Whitechurch Securities, says it is a long-established brand with a solid name.

“They are getting some brand awareness on the retail side,” he says. “They certainly made a profile. They have spread into the fixed income side, hired some good managers from Swip. We have met the team a couple of times and it is an area we were impressed with. They are definitely on our radar.”

Overall, the young firm has some bedding-in to do with its growing range of funds and fund managers. Of its range of funds with a one-year track record to February 3, performance is mixed, with one first quartile, two second quartile, two third quartile and one fourth quartile, according to Morningstar.

The next 12 months will be crucial for ATI’s “entrepreneurs”. Performance will have to start ticking up if the firm is to make its name independently of its famous parent. This will also be crucial to capture the imagination of the investing public.

Alliance Trust Investments is a subsidiary of the Alliance Trust investment company. It has seven funds and £573m assets under management. It runs three offices – in Dundee, Edinburgh, and London.