Alliance remixed at triple strength

Launched amid the financial crisis, Alliance Trust Investments found that an established brand name was not enough and has reinvented itself with a three-pronged strategy

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Starting a fund management business in the midst of the financial crisis presents its challenges. Re-engineering a business just as the markets have turned undoubtedly presents some more. However Alliance Trust Investments is confident that its change of direction, focusing on three key markets of global, socially responsible and fixed income investing – will finally see it build the scale it needs to compete.

The business was launched in 2009, seeded with capital from the ancient and worthy Dundee-based investment trust Alliance Trust. The idea was to bring a new revenue stream for the trust, building on the trust’s relatively diverse investment management expertise.

The group undoubtedly had an established investment brand, but the new group was striving to appeal to a different – and possibly more discerning – type of audience. Initially, it started by launching funds for the managers of the original trust, mostly regional specialist funds in Europe, the US, Japan and the UK

But, while this worked in places, it did not work as a whole. The tide was moving against regional funds and towards a global approach. The recruitment of Ilario di Bon, a global equity manager from Fidelity, in 2011, marked the start of a change of direction for Alliance Trust Investments, which has now culminated in the closure of many of the original funds and a refocusing on a number of specialist areas.

Di Bon pulled together a team of 10 global sector specialists, based in London. Ed Troughton, managing director at the group says: “They took over the trust portfolio and started to manage it in a high conviction, long-term unconstrained way, uninfluenced by benchmark.” They also launched the Global Thematic Opportunities fund.

The first of the group’s major restructuring efforts took place in mid-2012. Troughton says: “We moved from having regional based portfolios of 200 stocks, to a more concentrated global based portfolio of around 100 stocks. The regional team was disbanded and moved into the global equity investment team.” The group closed three funds – UK Equity Income, Japan, Asia Pacific. They were £48m, £35m, and £46m in size respectively.

But this proved only the start of the change in direction for the group. In August 2012, they bought the six-man SRI team led by Peter Michaelis from Aviva, who had decided to focus its attentions elsewhere. This brought £1.2bn in assets.

Troughton says: “This was a very good fit for the business. The team had worked with Katherine Garrett-Cox before and are real specialists in their field. We now have seven sustainable future funds and one Sicav for the European market. The team is well-established and they are largely integrated into our business. We lost virtually no business in the move.” The funds crossed both bond and equity funds. The largest portfolio, at £375m is the Sustainable Future Managed fund.

The final change was the closure of the £77m North American and £60m European Equity funds in mid-May of this year. Although the North American fund, managed by Matthew Strachan, had underperformed its peer group since inception, the European Equity fund, co-managed by Fiona MacRae and Tommy Bryson was ahead of the sector average.

With hindsight it was always unlikely that these single strategy funds would survive the change in direction. Troughton says: “We have taken some tough decisions over the past year. Closing funds is never easy, but it was the right decision. We now have a sharp and clear focus on what we want to offer – fixed income, SRI and global equities.”

The fixed income team is the one part of the original business that has stuck. The team of Stuart McMasters and Stuart Steven joined the group from Scottish Widows Investment Partnership in August 2009 and has survived the change in strategy. The group has the Monthly Income Bond fund, which at £330m has been the largest and most successful of the group’s original fund line-up. Partly, this has been down to its attractive, regular yield and the solid reputation of McMasters and Steven.

The group launched a Dynamic Bond fund for the pair in September 2012, to tap into the vogue for more strategic bond funds. It recognised that investors increasingly wanted to replace the higher yield they were no longer generating from conventional fixed income funds. The fund aims to generate a yield of 6 per cent on a rolling three year basis. It sits in the Absolute Return sector. To support the launch, the group recruited  Juan Valenzuela, also from Swip.  

Troughton says: “This fund was originally designed with the UK pension fund market in mind. It should be able to protect the downside if interest rates go up fast – it can go short duration. It has a multi-credit, multi-fixed income mandate. It can go globally; it can go short.”

The fund only has a short track record, but is up 2.2 per cent over six months and 0.1 per cent over three months.

Troughton says the fund addresses one of the biggest challenges they face as a business: “A lot of end investors tend to be conservative,” he says. “If they strive to buy a ‘riskless’ asset such as gilts they could be sitting on a time bomb. I do not believe it will happen, but investors need to look carefully to find fund managers that will give protection. There is a temptation to reach for yield, looking at riskier assets.”

On performance, the standout fund is the UK Ethical fund, which is top quartile over one and three years. After a tough start, performance on the Global Thematic Opportunities fund has notably improved since the start of 2013 and investors may be hopeful of better things. Elsewhere the performance is largely second quartile, which may or may not be enough to get the funds noticed.

After this whirlwind of restructuring, funds under management are now £2.2bn, up from £550m at the start of 2012, although the bulk of this has come from the Aviva deal. It may not have been a comfortable ride, but Troughton says they have come a long way.

“In February 2009 we  had zero assets under management. We were launching a third party fund management on the back of asset management institution that has been known and investing for generations. We had to have patience to build the business.”

He says the Monthly Income Bond fund is now well-established with the group’s target audience. The Dynamic fund is getting a good hearing among its target market of consultants and discretionary fund managers.

On the SRI business, he says: “We need to build from here. Aviva said it was a ‘dead asset’. We do not believe that at all. It is a profitable asset and they are an outstanding investment team that are so passionate about making capitalism better. We will use the Sicav to build in the European market and build relationships with distributors.”

An ongoing challenge for the group has been that the type of investors with whom the group has brand recognition – the private investors who hold the Alliance Investment trust – are not the same investors to whom the group is now marketing its fund range.

Troughton admits the group has had to build credibility: “We started with the launch of pooled vehicles for discretionary top-end IFAs and then, ultimately, platforms. We needed to build an understanding of who we were. This market had to understand that it would not be a flash in the pan, that we would be here for the long-term. We have had to build up the business in some horrible markets, but we have stuck around.”

The group has progressively built up its sales and distribution personnel. Troughton hired former BlackRock colleague Barry Keane as head of institutional business development. Keane is striving to build up the group’s consultant relationships. Joanna Wright, previously of Goldman Sachs Asset Management, was hired to build the group’s strategic partnerships. Troughton says the group is now on 35 different platforms and has forged some major strategic relationships such as Aviva Life.

The group was brave to change direction while still at a relatively fledgling stage of its development, but Troughton says the current asset management climate requires plenty of self-analysis. He concludes: “Asset management was never likely to be the same again the day Lehman collapsed. We lost a lot of trust. The FCA has made it clear that caveat emptor is not good enough. You have to do some soul-searching as to which strategies are suitable. It will take a little bit of time to adjust. We believe the changes we have made will pay off.”

The independent views

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Gavin Haynes, investment director, Whitechurch Securities

“In Stuart McMasters and Stuart Steven, Alliance Trust have experienced managers within the fixed income arena. However, the Monthly Income fund is now approaching a three year track record and has not stood out in the competitive IMA £ Corporate Bond sector, where flows tend to be concentrated towards a small number of providers. Within equities, Alliance’s focus appears to be very much upon the specialist area of socially responsible investing. Securing Aviva’s highly regarded SRI team led by Peter Michaelis was a statement of intent regarding their intention to be a force in this niche area.”

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Juliet Schooling, head of research, Chelsea Financial Services

“Alliance Trust Investments has undergone quite a lot of change in the last 12 months or so, with a number of funds closed last year and a couple due to close in June this year (their North American and European Equity funds). Redundancies have also been made. The restructuring has taken place so that the company can focus on what it sees as its core strategies, namely SRI, fixed income and global, all of which have had mixed performance records. These teams have been strengthened, with some hires made such as Ilario Di Bon. The portfolios have also become more concentrated.
“Despite all this upheaval, over the last 12 months, performance across most of the fund ranges has improved and most funds have first or second quartile performance over this time period.

The monthly income fund in the Corporate Bond sector has had a good start and has a yield of 5.5 per cent, which will be attractive to investors searching for income at the moment.

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Jeremy Stanyer, investment director, Rathbones

“I have held the Monthly Income fund for some time. I like the strength of the team and their experience. It also has a reasonable yield and the fact it pays monthly is important for some clients. The team are knowledgeable – there is no point looking for trouble in that sector. We also hold the Global Thematic Opportunities fund, run by Ilario de Bon. I very much like his way of looking at the world and he is also very experienced.”

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Alliance Trust Investments

Alliance Trust Investments was launched as Alliance Trust Asset Management in January 2009. It now has £2.2bn under management. Assets were given a significant boost with the acquisition of the Aviva SRI team last year. The group has also recently undertaken significant restructuring to focus on SRI, global and fixed income investing.