Alliance Trust : Quarterly Newsletter 2020 Winter

QUARTERLY NEWSLETTER • WINTER 2020

WHAT CAN WE EXPECT IN 2021?

By Alliance Trust

It has been said many times that 2020 has been a year fraught with uncertainty. Financial markets have swung from difficult lows to unexpected highs, while the wider economic environment has been tough for businesses and individuals alike. In the midst of this, the Alliance Trust investment committee and its team of nine stock pickers have been monitoring markets, valuations and the underlying companies within the global equity portfolio, to ensure it remains on track and focused with a long-term outlook. The future remains uncertain, but there is cautious optimism among the investment team amid the vaccine roll-out against Covid-19 and hopes for economic recovery. As we enter a new year, we have gathered the head of the investment committee and some of our nine stock pickers to explain their expectations for the next 12 months.

Craig Baker Chairman of the

Alliance Trust Investment Committee

and CIO of Willis Towers Watson

Financial markets always face uncertainty, but as we enter 2021 there is more reason than ever to be cautious and avoid betting on particular countries, sectors or investment styles. We are in the midst of a global pandemic and, despite positive news on the vaccine front, there is still

a lot that could go wrong, not least the policy responses, which could vary widely between governments. Any rise in inflation expectations or significant tax changes could dramatically affect the style or sectors driving the market. For that reason, we think it's vital to have a diversified portfolio focused on stock selection rather than macro factors as its key driver.

ALLIANCE TRUST: DIVERSIFIED, HIGH-CONVICTION

Research shows that active equity managers add most value through a small number of their highest- conviction positions1. Yet, the performance of concentrated portfolios can also be highly volatile.

The Alliance Trust portfolio mitigates this risk by blending together the best ideas of nine best-in-class2 stock pickers, each with different, complementary styles. We believe our diversified, high-conviction, global equity strategy should deliver more consistent outperformance and lower volatility than a strategy run by a single manager. Returns from single-manager strategies are often prone to sharp up and down moves; we aim to provide investors with a smoother ride.

1. Sebastian & Attaluri, Conviction in Equity Investing, The Journal of Portfolio Management, Summer 2014. 2. As rated by Willis Towers Watson.

Bill Kanko Founder and President of Black Creek Investment Management

We expect widespread vaccinations in the first half of the year to lead to a recovery in the second half. This post-pandemic recovery should favour a broad rally

in stocks, helping to rebalance equity markets that have become heavily biased towards larger companies and momentum stocks such as Tesla, Apple and Microsoft. Small to mid-cap stocks should benefit from an economic recovery once the current crisis abates.

US equity growth stocks look priced for perfection. Current equity valuations suggest that a market rebound will favour the UK, Continental Europe and other international and developing markets over the US. We expect Asian economies, which except for India have handled the pandemic more effectively than much of the West, to lead the post-Covid recovery. Chinese growth is already back to pre-crisis levels, and with an expected improvement in China/US relations under

a Biden administration, it looks well placed to be a leader in the recovery.

"We will continue to look past current trends and the noise of the markets and use volatility to our advantage as we invest in a portfolio of winning businesses at attractive valuations."

A CAUTIOUSLY OPTIMISTIC OUTLOOK

We are acutely aware of the forces

at work on global markets, however, we take a bottom-up approach. For Black

Creek, successful investing requires evaluating companies on a fundamental basis and taking a long-term view, rather than positioning portfolios based on any short-term market views, which are inherently unreliable. As always, we will continue to look past current trends and the noise of the markets and use volatility to our advantage as we invest in a portfolio of winning businesses at attractive valuations.

The start to 2021 will likely remain challenging given volatility caused by disappointments in economic activity due to further pandemic-related lockdowns. However, the delivery and distribution of vaccines in the first half of the year should lead to an economic recovery in the second half given pent up demand.

Equity markets have become increasingly beholden to accommodative central bank policies and low interest rates. Areas such as large cap tech stocks, EV manufacturers and new IPOs are plagued by high valuations and unrealistic growth expectations.

We believe that post-pandemic, equity markets will favour a broader rally in stocks and help rebalance equity markets that have become heavily biased towards growth and momentum stocks.

Rajiv Jain Chairman and CIO of GQG Partners

Despite a recent resurgence of Covid-19 cases, markets continued to move in full force for much of the final three months of 2020, with commodities and bond yields rising on the back of a declining dollar and rising inflation expectations. With the rise in interest rates, the spread between two and ten-year Treasuries hit its widest level since February 2018, a potential sign of improving global economic conditions. Additionally, increased improvement on

the global vaccine front saw a re-rating across a variety of economically sensitive sectors, and this certainly was reflected in recent market performance. However, we find ourselves questioning the sustainability of some of the recent rally in highly economically sensitive areas given the lack of clarity on vaccine distribution and uptake. While we remain cautiously optimistic for 2021, and do believe select cyclical stocks will do quite well, we also believe that certain industries have indeed run too far too fast, as some parts of the market are now trading at levels higher than their pre-Covid levels despite a lack of upward earnings revisions combined with degrees of structural business impairment.

A QUALITY AND SECTOR-AGNOSTIC APPROACH TO STOCK SELECTION

We believe a balanced approach is warranted, given a lack of margin of safety across a spectrum of companies, with a lack of clarity on future earnings growth heading into 2021. As is always the case, our quality, sector-agnostic approach allows us to focus on the question of 'What are we receiving for the prices we're paying?' regardless of where a company falls on the style box or factor bucket spectrum.

We continue to find bright spots across areas such as healthcare, where we believe select companies continue to benefit from secular tailwinds combined with attractive valuations. Even though we do not build portfolios by purchasing entire sectors, it is interesting to see, when using the S&P 500 as a proxy, that the healthcare sector is the only sector this year, up to the end of November, to simultaneously see positive forward earning-per-share revisions, yet see price- to-earnings multiples fall. If earnings are like gravity, and we continue to believe that they are, then 2021 could be quite robust for these companies.

EXPLORE more investment expertise

LOST AND FOUND SHARES

By Faith Glasgow

Have you ever been contacted by a bank or building society with the news that you have an account you had forgotten all about? Or maybe you've been the instigator of the hunt, trying to track down a lost pension, insurance policy or shares?

If so, you're by no means alone. Recent research from Gretel, an online hub being set up to help consumers reconnect with their lost finances, indicates that one in four adults in the UK believes they have at least one lost or dormant cash account, amounting to an estimated 10 million inactive accounts worth £4.5 billion.3

OVER £15 BILLION UNCLAIMED ASSETS IN THE UK

Add in other mislaid financial assets and the numbers rise dramatically. There's no central record, but Gretel puts the total number of individuals affected at almost 20 million and the value of unclaimed assets

- including bank accounts, pensions,

investments, life insurance and child trust funds - at more than £50 billion, including £37 million in pensions alone. Experian is more conservative, quoting £15-20 billion.4

Certainly, it is all too easy to lose contact with a provider and simply slip off its radar. Many dormant accounts belong to elderly or infirm people who struggle to keep

on top of their affairs, or move to a care home and in due course die, often without being able to put their finances in good order. Disconnection can easily happen to younger, healthy people too, particularly as a result of key life changes such as moving house, getting married or switching jobs, or if they make an investment without informing their partner.

Assets can also go adrift if a company changes its name, is bought out or wound up. Such events have happened many times in the world of financial services over the past 20 or 30 years.

The issue of lost assets has been recognised by financial services companies for quite a while. Since 2008 there

has been a dormant assets scheme in place for banks and building societies, allowing them to transfer dormant assets whose owners cannot be traced to a separate fund that supports various good social causes.5 At present, 33 financial institutions are signed up;6 around £100 million has been successfully returned to the owners of 110,000 accounts, while unclaimed savings worth almost £750 million have gone to charitable schemes.7

"One big question this throws up for consumers, is just how 'dormant' an asset needs to be before a financial services provider should take the initiative and try to hunt down the owner."

The government has recently confirmed the extension of that scheme to other types of financial asset - including investments and shares such as those

3. https://www.gretel.co.uk/media-centre, press release 17/11/2020 4. https://www.uar.co.uk/Help/AboutLostAssets 5. https://www.gov.uk/government/publications/the- dormant-accounts-scheme6. https://www.reclaimfund.co.uk/wp-content/uploads/2020/09/Dormant-Assets-Information-Guide.pdf, page 8 7. https://www.reclaimfund.co.uk/ wp-content/uploads/2020/09/Dormant-Assets-Information-Guide.pdf, page 12

owned by Alliance Trust shareholders - though there is no indication as to when it could take effect.8

WHEN IS AN ASSET CONSIDERED 'DORMANT'?

One big question this throws up for consumers, is just how 'dormant' an asset needs to be before a financial services provider should take the initiative and try to hunt down the owner. As things stand, there's no universally accepted definition of dormancy, but the government's consultation proposes that a dormant share should be seen as one where there have been no transactions or contact from the shareholder for at least 12 years, and during that time the provider has made 'reasonable efforts' without success to reunite the asset with its owner, and at least three dividends have gone unclaimed or unpaid.9

Importantly, though, before an asset can be considered dormant, the institution has to make its best efforts to try to bring it to its owner's attention. Some, Alliance Trust included, operate a tracing programme through which they make regular or ad hoc attempts to track down 'gone-away'account-holders or shareholders.

These programmes are particularly important - from the perspective of good housekeeping as much as best practice

• after a corporate action such as a merger or acquisition, points out share administrator EQ (formerly Equiniti). "By not running a tracing programme after a corporate event, a company may incur added complexity and cost in maintaining their register," it notes.10

More generally, so-called asset reunification programmes are considered "not only best practice but also good corporate governance".

ALLIANCE TRUST'S TRACING COMMITMENT

At Alliance Trust, a recent overhaul of the company articles (its rules and regulations) provided the catalyst to undertake such an exercise. Having updated the Company's definition of what counts as dormancy, the share registrars identified 90 Alliance Trust 'gone-away' shareholders to be traced. Between them, they owned about £1 million in shares and had uncashed dividends totalling over £200,000; the largest holding comprised 10,000 shares, and the longest-dormant account went back to 1998.

In fact, this was not the first such effort made by Alliance Trust - a previous search

had thrown up 291 names, including some of the outstanding 90, and an external company had had some success, repatriating 170 shareholders with their shares and dividends, with another 51 identified but still to finalise their claims.

But this time around, rather than simply repeating the process, Alliance Trust's commercial and corporate governance manager, Ian Anderson, decided to do some more in-depth sleuth work of his own, followed by a personal approach from the Company. Starting with the largest shareholdings, he made online searches of publicly available resources such as death registrations, which in some cases led to wills available in the probate registry, and in turn to the names of executors and solicitors involved in the winding-up of the estate.

"Having updated the Company's definition of what counts as dormancy, the share registrars identified 90 Alliance Trust 'gone-away' shareholders to be traced. Between them, they owned about £1 million in shares and had uncashed dividends totalling over £200,000; the largest holding comprised 10,000 shares, and the longest-dormant account went back to 1998."

Some searches proved pretty straightforward. "LinkedIn was a good way of making contact with people by telephone, or by email where an email address could be found. This also allowed the individuals I contacted, the information that they needed to check that my contact was bona fide and not some form of phishing scam," Anderson says.

"For example, one shareholder had a very distinctive name which came up quickly from a simple Google search followed up by a LinkedIn contact, so that took maybe half an hour at most." This gave the shareholder a windfall of nearly £2,000 in past dividends.

But on other occasions he found himself having to think very laterally. Tracking down the identity of one long-dead shareholder involved working out where she had lived many years ago and talking

8. https://www.gov.uk/government/news/plans-for-major-expansion-of-dormant-assets-scheme-to-benefit-good-causes9. https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/877025/Consultation_on_expanding_the_dormant_assets_scheme.pdf, page 12 10.https://equiniti.com/uk/news-and-views/eq-views/how-to-address-dormancy-on-your-share-register/