Fund Battle: Alliance Trust vs F&C Investment Trust

Multi-manager, or fund-of-fund, strategies work well as potential one-stop shop solutions for beginner investors. They are also worthy contenders for portfolio core holdings due to being globally diversified.

However, a sting in the tail is that many of these strategies have premium fees, due to the double layer of charges that applies to a fund buying other funds. It is typical to see a multi-manager, or fund-of-fund, approach with a yearly charge of 1% to 1.3%, or higher.

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Both Alliance Trust (LSE:ATST) and F&C Investment Trust (LSE:FCIT) have lower yearly charges than most of their multi-manager fund rivals, at 0.89% and 0.84% respectively. This is a key attraction, as costs are the only thing that investors can control from the outset.

Below in our latest Fund Battle article, we pit the two investment trusts against each other, including examining how their investment approaches differ and scrutinising performance over various time frames.

How the duo compare

Both trusts have been around since the Victorian era. F&C is the oldest investment trust, launched in 1868, and it entered the FTSE 100 index last summer. Total assets stand at £5.4 billion. It is one of interactive investor's Super 60 investment ideas.

Alliance Trust launched in 1888. It is a member of the FTSE 250 index and holds £3.3 billion in total assets.

Both trusts invest globally, aiming to deliver both capital growth and a rising dividend. Another commonality is that both aim to be style neutral, which is achieved by having high levels of diversification through holding hundreds of companies across a variety of countries and sectors. 

The trusts are popular among interactive investor customers, regularly appearing in our monthly top 10 most-bought investment trust table.

Paul Niven, fund manager of F&C Investment Trust, describes its approach as aiming to be a “one-stop shop for investors looking for exposure to growth assets, and growth assets are equities and private equity”.

Typically, around 10% is held in private equity, with the rest in equities.

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Niven, of BMO Global Asset Management, has been at the helm since 2014 and oversees the strategic and tactical asset allocation. He selects managers to run various strategies. These are predominantly from within BMO, giving him the flexibility to quickly tune the portfolio.

Alliance Trust’s entire portfolio is held in global equities. The decision-making is outsourced to 10 external fund managers. Most of those fund managers select 20 of their best ideas , but the emerging market part of the portfolio is an exception to this rule.

Craig Baker, of Willis Towers Watson, who oversees the portfolio with two colleagues, explains: “What we try and do is really ensure that stock selection drives everything from these managers. We've picked them because we think they're great at picking stocks rather than economies, geographies, sectors and the like.”

Portfolio

The US accounts for nearly 70% of the MSCI World index and over 60% for the FTSE All- World index. Therefore, for most global funds and investment trusts the US is their largest country allocation.

This is the case for Alliance Trust and F&C Investment Trust, which both have just over 50% in US shares.

Technology shares are prominent among the biggest stock positions. Alliance Trust’s top three holdings are Alphabet Inc Class A (NASDAQ:GOOGL), Microsoft Corp (NASDAQ:MSFT), and Amazon.com Inc (NASDAQ:AMZN), while F&C has Microsoft, Alphabet, and Apple Inc (NASDAQ:AAPL) as its top three.  

Since Willis Towers Watson took over the management of Alliance Trust six years ago, it has typically held less in big US tech compared to the index. However, its fund managers have been adding to US tech in more recent times on the back of share prices selling off last year in response to interest rate rises.

F&C Investment Trust is underweight US tech. In an interview with interactive investor last October, Niven said he materially reduced exposure to large-cap US growth stocks in the second half of 2020 ahead of rate rises, which began at the end of the following year.  

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The weightings to Europe are similar for both trusts, with Alliance Trust allocating 14.2% versus 12.8% for F&C.

However, there’s a sizeable difference in terms of the Asia-Pacific and emerging market exposure. Alliance Trust holds 19.4% compared to 11% for F&C.

Both trusts are modestly geared at around 4%. Baker says this is at the lower end of the gearing range, reflecting that he is cautious about the outlook for stock markets, given the risk of a recession.

Dividends and yield

Both trusts are “dividend heroes” and have demonstrated a remarkable track record of income consistency. Alliance Trust has raised payouts for 56 years, while F&C has a 52-year track record.

Those dividend track records look sustainable. According to the Association of Investment Companies (AIC), both have more than a year in revenue reserves, which is income set aside for a rainy day. Alliance Trust has 1.5 years, while F&C has 1.4 years. In theory, if all the income dried up from the underlying holdings, their dividend track records would be able to continue providing that the respective boards gave their approval to utilise the revenue reserves.

However, for investors looking for a high starting yield, the duo may not fit the bill. Alliance Trust is yielding 2.3%, while F&C has a yield of 1.5%.

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Baker expects stock markets to remain volatile given that there’s no shortage of macro headings. Such an environment makes “making binary bets on macro factors extremely risky”.

He adds: “We believe that retaining balanced exposure to all sectors, countries and styles, and a continued focus on individual stock selection is the right approach to meeting our objective of compounding shareholder returns over time.”

Niven also expects stock markets to remain volatile in the short term. He says: “F&C Investment Trust’s corporate structure makes us well-placed to withstand further market volatility, and we remain focused on the long-term opportunities for the benefit of our shareholders.”

Performance

Over five years both trusts have outperformed the average global trust, which gained 29.3% over the period.

Alliance Trust is up 49% versus 32% for F&C Investment Trust. Those figures, sourced from FE Fundinfo, are what investors would have made since they are share price total returns.

In terms of the performance of the underlying investments – the net asset value (NAV) – it is neck and neck. On this measure, over five years F&C has a slight edge, up 33.9% versus 32.5% for Alliance Trust.  

Both benchmarks the duo measure their performances against have returned around 50% over the past five years. Alliance Trust uses the MSCI All Country World index, while for F&C it's the FTSE All World index.  

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Over one year, Alliance Trust has the upper hand. Its NAV return is 9.4% compared to 2.9% for F&C Investment Trust. In share price total return terms Alliance Trust is up 13% versus 1.3% for F&C.

F&C’s private equity exposure has hit performance in the short term. This is due to scepticism over whether the valuations of unlisted companies have changed sufficiently to reflect the higher interest rate environment. However, Niven notes that “we have made good returns from our investments in this area over longer time periods”.

Discount

Most investment trusts are trading on discounts due to the rising interest rates since the end of 2021. Those rate rises have reduced the appeal of equity-focused trusts, given that yields of 4% to 5% are available on lower-risk assets, such as cash and bonds.

F&C Investment Trust has the higher discount at -8.8%. This figure is higher than its 12-month average discount of -5.1%. Alliance Trust’s discount is 5.1%, slightly above its 12-month average of -5.7%.

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Which trust should investors choose?

At the risk of getting a splinter from sitting on the fence, both are worthy of being core holdings.

They are both highly diversified trusts, consistent income payers, and solid long-term performers.

An alternative option

Witan (LSE:WTAN), managed by Andrew Bell, is another option to consider for those looking for the multi-manager approach via investment trusts.

Most of the Witan portfolio is outsourced to external fund managers, asides from a 10% allocation managed by Bell. For this part of the portfolio, Bell looks to invest in areas where the external fund managers would not invest, such as private equity. He also keeps a close eye on “special situations”, such as investment trusts that are out of favour.

Witan, established in 1909, is also an investment trust dividend hero, having increased payouts for 48 consecutive years. Its dividend yield is 2.5%.

Its five-year share price total return of 15.7% lags both Alliance Trust and F&C, while its NAV return over this period is 4.2%.

Over one year, its share price total return is 6.9%, which puts it ahead of F&C, but below Alliance Trust. Its one-year NAV return is 2.9%, the same as F&C.

Witan is trading on a discount of -7.6% compared to a 12-month discount average of -8.7%.