Alliance Trust PLC - Interim Results

Alliance Trust PLC (‘the Company’)
LEI: 213800SZZD4E2IOZ9W55

25 July 2024

Strong Investment Returns

Results for the six months ended 30 June 2024

Key Points

• NAV Total Return of 9.5% and Share Price Total Return of 10.2% vs 12.2% for MSCI ACWI.
• Discount remains stable and is markedly narrower than the Association of Investment Companies’ Global Sector average.
• Second interim dividend of 6.62p declared, the total of the first two interim dividends declared for 2024 is 13.24p (2023: 12.52p), representing an increase of 5.8% on the same payments for 2023.
• Combination with Witan Investment Trust to be approved by shareholders.

Dean Buckley, Chair of Alliance Trust PLC, commented:
"It has been an eventful period. Returns have been strong and we have announced the Company's intention to combine with Witan Investment Trust plc to create Alliance Witan PLC.”

About Alliance Trust PLC
Alliance Trust aims to be a core investment that beats Inflation over the long term through a combination of capital growth and a rising dividend. The Company invests in listed, global equities across a wide range of different sectors and industries to achieve its objective. Our investment manager, Willis Towers Watson, blends the top stock selections of some of the world’s best active managers into a single diversified portfolio designed to outperform the market while carefully managing risk and volatility. Alliance Trust is an AIC Dividend Hero with 57 consecutive years of rising dividends.

https://www.alliancetrust.co.uk

Interim Report for the six months ended 30 June 2024 (unaudited)

Our Performance - Financial Highlights as at 30 June 2024

1. Alternative Performance Measure.
2. Total dividends declared in the period.
NAV Per Share including income with debt at fair value.
NAV Total Return based on NAV including income with debt at fair value and after all costs.

Source: Morningstar and Juniper Partners Limited (‘Juniper’).

Chair’s Statement

I am pleased to present the Interim Report for the six months ended 30 June 2024. It has been an eventful period. Returns have been strong and we have announced the Company’s intention to combine with Witan Investment Trust plc (‘Witan’) to create Alliance Witan PLC.

Many of you will already have seen the details of the proposed transaction on the London Stock Exchange’s regulatory news service or in the media. If not, you can find the full announcement setting out the proposed terms on the Company’s website at www.alliancetrust.co.uk.

The proposed transaction will not lead to any change in Alliance Trust’s successful investment strategy, just a larger pool of assets for the Company’s Investment Manager, Towers Watson Investment Management Limited (referred to as `Willis Towers Watson’ or `WTW’), to manage in the same way that it currently manages the existing portfolio. This will result in economies of scale, meaning lower ongoing charges for shareholders, and a higher profile for the Company which will hopefully attract additional interest from potential investors. A significant contribution from WTW will ensure that none of the transaction costs fall on Alliance Trust shareholders.

The proposed combination does, of course, need approval from both sets of shareholders. We will soon be publishing further documentation relating to the proposed transaction for you to consider, to be followed by a General Meeting, expected to be held in Dundee in late September/ early October, when you will have the chance to vote on the proposed combination. You will, of course, be able to vote your shares in advance and attend virtually as per our Annual General Meeting earlier in the year. Further details will be available on the Company’s website In due course.

In the meantime, if you have any questions, I can be contacted via the Company’s shareholder e-mail address: investor@alliancetrust.co.uk.

Investment Performance
The Company produced very strong investment returns for the six months ended 30 June 2024, with a Net Asset Value (‘NAV’) Total Return of 9.5%. Over this particular six-month period, we underperformed our benchmark index, the MSCI All Country World Index (‘MSCI ACWI’), which returned 12.2% over the same period.

Our underperformance against the index was primarily attributable to market returns being highly concentrated in a narrow group of artificial intelligence (‘AI’) related stocks. This has made it difficult for active managers to outperform, but WTW is confident that the portfolio is well positioned for long-term returns versus the index. The Company’s Share Price Total Return was 10.2%, marginally underperforming the average Share Price Total Return of the Association of Investment Companies (‘AIC’) Global Sector peer group of 10.7%.

A full analysis of the Company’s investment performance can be found in the Investment Manager’s Report.

Discount Management

One of the Board’s strategic objectives is to maintain a stable share price discount to NAV, and where practicable, to facilitate our shares trading at close to NAV. The Company’s average discount over the period was 4.8%, which compares favourably to the average AIC Global Sector discount of 9.7%. As at 30 June 2024 the Company’s discount was 4.9%.

To support the stability of the share rating, 1,705,000 shares (equivalent to 0.6% of the number of shares in issue at the start of the period) were bought back and placed in Treasury during the six months to 30 June 2024. These shares held in Treasury can be re-issued by the Company at a premium to estimated NAV when there is market demand.

Second Interim Dividend

We have announced a second interim dividend for 2024 of 6.62p per share (2023: 6.34p). The total of the first two interim dividends declared for 2024 is 13.24p (2023: 12.52p), representing an increase of 5.8% on the same payments for 2023. This level of dividend is well supported by the Company’s investment strategy and its significant distributable reserves, which stood at over £3.5 billion as at 30 June 2024.

Barring any unforeseen circumstances, it is anticipated that the Company’s third and fourth interim dividends will be at least equal to the first and second interim dividends. This would result in a total dividend for the 2024 financial year of at least 26.48p per share which, based on the Company’s share price of 1,212.0p as at 30 June 2024, would represent an annual dividend yield of 2.2% and a 5.1% increase over dividends paid for the financial year ended 31 December 2023.

As shareholders may be aware, in the event that the proposed combination with Witan proceeds as expected, it is the intention of the Board to increase the third and fourth interim dividends for the current financial year (which would each be paid after completion of the combination) so that they are commensurate with the interim dividend payments currently being paid to Witan shareholders. Further information on this potential increase in dividend, including illustrative figures by way of information, is provided in the full transaction announcement made by the Company on 26 June 2024.

Shareholder Engagement
I am delighted to let you know that we will be holding an investor forum in London at WTW’s offices in Lime Street on Friday, 25 October 2024, when shareholders will be provided with an investment update from WTW and will hear presentations from two of our stock pickers. An on-line live feed will also be made available for shareholders unable to attend in person. Shareholders wishing to attend the investor forum in person or view the live feed will need to pre-register. Further details of the investor forum and how to register will be made available on the Company’s website in due course.

The Company has invested in its brand and website to improve communication with shareholders, raise the profile of the Company and attract new investors to increase shareholder returns. You may have noticed that we launched our refreshed brand in May with a new website and an advertising campaign. Having carefully studied investor feedback, we concluded that, after a very volatile last few years, what we offer fits very well with what many investors are looking for – a comfortable balance between risk and return. So, we adapted our messaging and the look and feel of our brand accordingly.

If you have not yet done so, I would encourage you to subscribe to receive the quarterly newsletter, monthly factsheet and other news and events.

Outlook
The economic and political outlook remains uncertain. This is reflected in our modest net gearing of 4.6%. Although any faint doubt about the result of the general election in the UK has been removed, there is still the US presidential election to come, and the global economy seems delicately balanced between faster or slower growth. However, rather than attempting to second-guess macroeconomic or political outcomes, our investment strategy will continue to focus on a diversified but high conviction approach to stock picking based on the fundamentals of individual businesses. It will not always outperform the market in every discrete period, particularly when the market is so concentrated, but we believe it will continue to add significant value for shareholders in the long run.

I look forward to meeting as many of you as possible at the General Meeting in Dundee or the investor forum in London.

Dean Buckley
Chair
25 July 2024

Investment Manager’s Report

Global equities continued to rise in the first half of 2024, although investors’ hopes at the start of the year for a rapid reduction in interest rates to boost equity valuations and corporate profit margins were thwarted by the surprising resilience of economic growth and the persistence of inflationary pressures, including wage growth.

While market breadth continued to increase regionally, the US still dominated, and returns by sector became extremely concentrated in information technology as the half-year progressed due to investors’ enthusiasm for AI. Indeed, almost a quarter (23%) of the MSCI ACWI’s 12.2% advance came from just one stock, NVIDIA, whose valuation rose by an astonishing 151% in six months. NVIDIA’s cutting-edge chips are at the epicentre of the AI boom and its surging stock price meant that it briefly overtook Microsoft and Apple to become the world’s most valuable company.

A Game of Two Quarters

It was a period of two distinct quarters for our portfolio, with outperformance of the index in the first quarter due to good stock selection across a variety of countries and industries. But we underperformed in the second, largely because of our underweight positions in NVIDIA, and Apple which rallied in the second quarter after announcing new AI features for its phones.

Over the six-month period our portfolio delivered a robust absolute NAV Total Return of 9.5% but lagged the MSCI ACWI by 2.7%. Our Share Price Total Return was slightly higher than the NAV Total Return at 10.2%, due to a narrowing of the discount from 5.4% to 4.9%. The table below shows the detailed contribution analysis.

Source: Performance and attribution data sourced from WTW, Juniper, MSCI, FactSet and Morningstar as at 30 June 2024. Percentages may not add due to rounding.

Against a highly concentrated index return, most of our managers struggled to add value across the whole six months. Although GQG Partners (‘GQG’) stood out as a stronger performer, Sands Capital (‘Sands’) and Vulcan Value Partners were the only other two who modestly boosted relative returns. The success of all three managers was in large part attributable to strong returns from their technology holdings, especially NVIDIA, which was held by GQG and Sands. The other seven managers were handicapped by not holding NVIDIA and by having overall underweight positions relative to the index in giant tech companies. Our average portfolio weight in NVIDIA was 2.2% versus 3% for the index.

There were, however, several cases of stock selections which were costly over the six-month period.

For example, the share prices of Diageo, the UK drinks giant, and Visa, the US digital payments business, both of which are held by more than one manager, and therefore represent two of our larger holdings, did not perform well, though our managers continue to believe in their long-term prospects. Another company to struggle was the airline Ryanair, which warned of softer ticket pricing at the start of the holiday season, though Metropolis Capital (‘Metropolis’), which owns the stock, says the long-term outlook for fares and the business remains positive. Vinci, the French infrastructure group, owned by Veritas Asset Management (‘Veritas’), also fell sharply.

Vinci’s share price decline followed threats from the French far-right National Rally party to nationalise motorways, which is where its concessions are the biggest source of profits. However, National Rally did not perform as well as expected in the French general election, and Veritas says that Vinci’s shares offer good value.

The detractors were partially offset by strong performance from a wide range of our other holdings.

For example, we benefitted from:

• a 31% rise in Alphabet, which continues to enjoy strong earnings growth and surprised investors with a stock buyback and its first dividend;
• a 36% rise in Ebara, the Japanese industrial group, which has exposure to semiconductor manufacturing through its Precision Machinery Business;
• a 28% rise in Amazon.com, which reported a 221% year-on-year rise in operating income as advertising spend increased and the company’s web services division benefitted from customers modernising their tech infrastructure and addressing AI;
• a 41% rise in Novo Nordisk, the Danish company which continues to excite investors with its pioneering weight loss drugs; and
• a 57% increase in Hargreaves Lansdown, the UK investment platform, which benefitted from a takeover bid.
  
  

Although the geopolitical backdrop remains turbulent, we believe that the biggest risk facing investors today is the structure of the market index. The index we compare ourselves to, MSCI ACWI, holds around 3,000 stocks, with an average position size of 0.03%; but Microsoft, Apple, and NVIDIA each represent around 4% of the index at the end of the six-month period, more than 110x the average stock position size. Volatility in companies that are so large in the index creates significant distortions. When they move, the whole index moves with them.

Owning large overweight stakes in such companies as their share prices rise might help short-term performance but we believe it creates significant risks to long-term returns if sentiment turns against them or they fail to deliver expected profits. History shows that market concentration can persist for long periods but ultimately ends with many market leaders falling by the wayside. Remember Cisco, Intel and AOL, the fallen giants of the internet revolution in the late 1990s. So, we are acutely aware of the need to actively manage our exposures to achieve an acceptable balance between risk and reward.

Long Term Benefits of AI are Unclear
The stock market excitement around AI is understandable. It could be a game-changing technology, with huge potential benefits for productivity. But AI’s impact is still largely unknown. It is perhaps worth noting that, in this high-tech Gold rush, NVIDIA is providing picks and shovels to other industries looking to improve their efficiency. But the long-term revenues and profits of the technology are yet to emerge. They could be in farming, healthcare, financial services, or consumer service industries, for example, rather than the technology industry itself. And for the AI revolution to succeed, it also requires investment in the background infrastructure, such as data centres and electricity supply. We, therefore, prefer to spread our investments both within technology and beyond.

Investment Journey as Important as Destination
We believe our more diverse positioning, across investment styles, regions, industries, and stocks will serve shareholders well in the long term. For investors in a core, long-term holding such as Alliance Trust, the journey is just as important as the destination, and we aim to provide investors with a much more comfortable ride than a single-manager portfolio that is skewed towards a country or sector, which is more likely to experience higher peaks and lower troughs.

In our view, the portfolio is well positioned with high quality companies in every sector of the market.

Although changes of government generally do not make much difference to long-term stock market returns, they can impact investor sentiment or sectors in the short term, as the example of Vinci shows. So, with a new Labour government in the UK, the possibility of a second Donald Trump term in the US, ongoing wars in the Middle East and Ukraine, and no real clarity about the future direction of global economic growth, the world remains a fragile and uncertain place. More than ever, this emphasises the importance of staying diversified and using skilled active managers to exploit mispriced opportunities that arise out of the volatility that we are likely to continue to see as the year progresses.

This diverse positioning across countries, sectors and styles should serve us well in both a bullish scenario, where growth picks up as inflation and interest rates come down and stock market returns broaden out, and a bearish one, where inflation and interest rates remain stubbornly high and cause a slow slide into recession.

New Manager Appointed
The main change we made to portfolio positioning in the first half of the year was the replacement of Jupiter Asset Management (‘Jupiter’) with ARGA Investment Management (‘ARGA’). As mentioned in our first-quarter newsletter, this change followed Ben Whitmore’s decision to resign from Jupiter to set up his own business. It was unrelated to performance. While we continue to have high regard for Ben’s skill as an investor, his new business arrangements represented potential risks and we will take time to fully assess them. We decided to bring in a new manager with similar value characteristics to ensure the portfolio remains balanced across styles.

ARGA’s appointment brought several new holdings into the portfolio, such as Alaska Air, Tapestry, Boliden, and Société Générale. Alaska Air’s valuation has come under pressure from the impending acquisition of Hawaiian Airlines, but ARGA says Alaska Air has a strong balance sheet and the all-cash deal will increase its market share at Honolulu International Airport from 10% to 40%. Tapestry is a global luxury brand company. ARGA expects Tapestry to benefit from the recovery in revenue from Kate Spade, which sells designer handbags, clothing and accessories. In addition, Tapestry is in the process of completing the acquisition of the global fashion group Capri Holdings, whose brands include Versace, Jimmy Choo and Michael Kors. Boliden is a Swedish miner which has been hit by a copper smelter fire and the closure of a high-cost zinc mine, but ARGA says the company has plans to resolve these temporary issues and hopes to receive a fire insurance payment. Société Générale, the French bank, is expected to benefit from its exposure to French retail network mergers, new cost initiatives and lower regulatory costs.

In aggregate, stock turnover was 42% of the portfolio. The largest purchases and sales undertaken by our managers during the last six months are listed in the tables below.

Source: Juniper.

Further changes to portfolio positioning can be expected in the second half of the year if shareholders approve the combination with Witan. Up to that point, it will be business as usual, with us actively managing our allocations to each stock picker. However, the combination with Witan will give us the opportunity to consider whether to change the manager line up. We have two managers in common, GQG and Veritas, but Witan has other managers that we rate highly, and we have always said that the optimal number is between 8 and 12.

We will be using the services of a specialist transition manager to combine the portfolios. It should be noted too that there will be some less liquid holdings that come across from Witan. These are high quality assets, and it would not make sense in the short term to dispose of them. We are, therefore, likely to continue holding them for some time until a sale looks materially more attractive with proceeds being passed to the managers in place at the time.

Craig Baker, Stuart Gray, Mark Davis
Willis Towers Watson
Investment Manager

Responsible Investment

In the six months to 30 June 2024, EOS at Federated Hermes engaged with 95 companies held in the portfolio on a range of over 439 issues and objectives. Key areas of engagement included board effectiveness, climate change, human and labour rights, human capital, biodiversity, digital rights and AI. Over the same period, the Company’s Stock Pickers cast 2,717 votes at 184 company meetings. They voted on all the proposals that could be voted on in the period. The Company’s Stock Pickers voted against management on 320 proposals and abstained on 38 proposals. Of the votes exercised against company management, the most frequently recurring themes were compensation and director election.

Task Force on Climate Related Financial Disclosures (‘TCFD’)
The 2023 Product Level TCFD Report for the Company as prepared by WTW is available in the AIFM Disclosures & Policies section of the Company’s website www.alliancetrust.co.uk

Principal and Emerging Risks
In common with other financial services organisations, the Company’s business model results in inherent risks.

The Directors have carried out a robust assessment of the principal and emerging risks facing the Company and how these are continuously monitored and managed.

In pursuit of its strategic objectives, the Company faces the following principal risks:

• Investment – Market, Investment Performance, Strategy and Market Rating, Capital Structure and Financial
• Operational – Cybercrime, IT Systems Failure, Inadequacy of Oversight and Controls, Climate Risk, and Ineffective Disaster Recovery Planning.
• Legal and Regulatory Non-Compliance
  
  

These risks, and the way in which they are managed, are described in more detail within the How We Manage Our Risks section on pages 31 to 34 of the Annual Report for the year ended 31 December 2023, which is available on the Company’s website at www.alliancetrust.co.uk. The Board believes these principal risks and uncertainties are applicable to the remaining six months of the financial year, as they were to the six months ended 30 June 2024.

Emerging risks facing the Company have largely remained unchanged since those detailed in the Annual Report for the year ended 31 December 2023, namely geopolitical tension, governmental elections, global monetary policy, inflation and interest rate pressures.

These emerging risks are considered by the Board alongside its principal risks. The Board remains of the view that active management of the concentrated ‘best ideas’ approach employed by the Company will be able to take advantage of any volatility as it creates opportunities. The Board believes that the Company’s globally diversified multi-manager portfolio will be less volatile and, hopefully, a more rewarding investment.

Related Party Transactions
There were no transactions with related parties during the six months ended 30 June 2024 which had a material effect on the results or the financial position of the Company.

Going Concern Statement
As at 30 June 2024, while there have been market changes over the period, the Board does not consider that in relation to its ability to continue as a going concern that there have been any significant changes to these factors. The Directors, who have reviewed budgets, forecasts and sensitivities, consider that the Company has adequate financial resources to enable it to continue in operational existence for the foreseeable future.

Accordingly, the Directors believe it is appropriate to continue to adopt the going concern basis.

The factors impacting on going concern are set out in detail in the Company’s Viability Statement on pages 54 and 55 of the Annual Report for the year ended 31 December 2023. Factors considered included Financial Strength, Investment, Liquidity, Dividends, Reserves, Discount, Significant Risks, Borrowings, Reserves, Security and Operations.

Responsibility Statement

We confirm to the best of our knowledge that:

• The condensed set of financial statements which have been prepared in accordance with IAS 34 "Interim Financial Reporting” as adopted by the UK, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company as required by DTR 4.2.4 of the Disclosure, Guidance and Transparency Rules;
  
  
• The interim management report includes a fair review of the information required by:
  
  

  (a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the Annual Report for the year ended 31 December 2023 that could have a material effect on the financial position or performance of the Company in the first six months of the current financial year.
        


Signed on behalf of the Board

Dean Buckley
Chair
25 July 2024

Financial Statements

Condensed Income Statement (unaudited) for the period ended 30 June 2024

The Company does not have any other comprehensive income and hence profit for the period/year, as disclosed above, is the same as the Company’s total comprehensive income.

Condensed Statement of Changes in Equity (unaudited) for the period ended 30 June 2024

The £609.4m of Unrealised capital reserve (£341.3m at 30 June 2023 and £574.6m at 31 December 2023) arising on the revaluation of investments is subject to fair value movements and may not be readily realisable at short notice. As such it may not be entirely distributable. The Unrealised capital reserve includes unrealised gains on the fixed rate loans of £14.1m (£19.6m as at 30 June 2023 and £5.5m at 31 December 2023) which are not distributable.

Condensed Balance Sheet (unaudited) as at 30 June 2024

Condensed Cash Flow Statement (unaudited) for the period ended 30 June 2024

Notes to the Financial Statements

1. General information
   
   

The information contained in this Interim Report for the period ended 30 June 2024 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 December 2023 has been delivered to the Registrar of Companies. The auditor’s report on those financial statements was prepared under s495 and s496 of the Companies Act 2006. The Interim Report was not qualified, did not contain an emphasis of matter paragraph and did not contain statements under section 498(2) or (3) of the Companies Act.

The interim financial results are unaudited and have not been reviewed by the Company’s auditors. They should not be taken as a guide to the full year.

2. Accounting policies

Basis of preparation
These condensed interim financial statements for the six months to 30 June 2024 have been prepared in accordance with IAS 34 ‘Interim financial reporting’ and also in accordance with the measurement and recognition principles of UK adopted international accounting standards (‘IASs’) but are not the Company’s statutory accounts. They include comparators extracted from the Company’s statutory accounts but do not include all of the information required for full annual financial statements and should be read in conjunction with the 2023 Annual Report, which were prepared in accordance with the requirements of the Companies Act 2006 and in accordance with UK-adopted international accounting standards. Those accounts have been reported on by the Company’s auditors and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The Association of Investment Companies (‘AIC’) issued a Statement of Recommended Practice: Financial Statements of Investment Companies (‘SORP’) in July 2022. The Directors have sought to prepare the financial statements in accordance with the AIC SORP where the recommendations are consistent with IFRS. The Company qualifies as an investment entity.

Going concern
The Directors having assessed the principal and emerging risks of the Company have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for at least 12 months from date of approval. The Company’s assets, the majority of which are investments in quoted equity securities and are readily realisable, significantly exceed its liabilities. They therefore continue to adopt the going concern basis of accounting in preparing the financial statements. The Company’s business activities, together with the factors likely to affect its future development and performance are set out in the Strategic Report of the Annual Report for the financial year ended 31 December 2023.

Segmental reporting
The Company has identified a single operating segment, the investment trust, which aims to maximise shareholders returns. As such no segmental information has been included in these financial statements.

Application of accounting policies
The same accounting policies, presentations and methods of computation are followed in these financial statements as were applied in the Company’s annual audited financial statements for the financial year ended 31 December 2023.

3.  Income

4.  Investment management fees

The fee includes £8,580,000 for investment management services, which is allocated 25% to revenue and 75% to capital, and £641,000 for distribution services, which is recorded directly to revenue.

5. Dividends paid

Availability of Interim Report

The Interim Report will shortly be available to view on the Company's website at www.alliancetrust.co.uk

A copy of the Interim Report will shortly be submitted to the Financial Conduct Authority’s National Storage Mechanism and will be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism

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