Accepting share price is not a good indicator of competence though, so it is prudent to look at the performance of the underlying investments, such as net asst value, to determine how well the portfolio is being run. The share price has been trading at a significant discount to the NAV for some time, and the failure of these numbers to converge is a common warning sign that things are not going well.
The results are not flattering. Against the new peer group of Scottish Mortgage, Foreign & Colonial and Witan, Alliance Trust underperforms significantly. Again, though, the headline benchmark comparison might be misleading. The MSCI World Index is not greatly influenced by emerging markets and is a much better representation of the strategy pursued by Alliance Trust, which also focuses on developed world equities. When using this as a guide, results are also poor.
A superficial analysis also makes the Trust look reasonable on fees. The costs of funds in the sector range wildly and Alliance Trust looks to be down the cheaper end. But again when comparing it to its closest peers it seems uncompetitive. The fees for Alliance Trust are 14 basis points higher than Scottish Mortgage, with the former facing allegations that it has been less than transparent in declaring all of its costs.
Our position on Alliance Trust can be summed up quite succinctly. We like the funds, but dislike the investment trust. The whole affair has also reinforced this position more generally.
While the investment trust industry is not entirely made up of bad apples, the archaic structure lends itself to a lack of transparency and clarity that can add complexity and risk that is seldom well rewarded. It is worth remembering that Alliance Trust is supposed to be a retail investment: more than 60 per cent of investors are retail, and yet are expected to vote on a proposal by a US hedge fund to change the corporate governance structure.
Open-ended funds offer simplicity and clarity of purpose that makes it possible for the average investor to make a fair informed judgement on what they are investing in without having to consider the possibility that the fund manager might suddenly change tack and decide to open a leisure centre or pursue some other side project to the detriment of their day job.
There is a reason why open-ended funds have gained such prominence with investors, and Alliance Trust’s recent troubles have reminded us just what that is.
