Annual Report for the Year Ended 31 December 2017
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ANNUAL REPORT 2017 Annual Report for the year ended 31 December 2017 Alliance Trust is an investment trust with a unique global equity portfolio providing access to an alliance of ‘best-in-class’* equity managers and their best high-conviction ideas, all at a competitive cost. *As rated by Willis Towers Watson. CONTENTS Section I Section II Section III Strategic Report 1 Directors’ Report 28 Financial Statements 58 Our Performance in 2017 1 Board of Directors 28 Income statement 59 Chairman’s Statement 2 Corporate Governance 30 Statement of comprehensive income 59 Our Business Model 4 Board Evaluation 33 Statement of changes in equity 60 Investment Strategy 4 Audit and Risk Committee 34 Balance sheet 61 Investment Objective and Policy 4 Going Concern Statement 40 Cash flow statement 62 Key Performance Indicators 6 Viability Statement 41 Notes 63 Our Investment Manager 7 Remuneration Committee 42 The Equity Managers 8 Other Governance 49 Glossary: Performance Measures 89 Investment Manager’s Report 9 Independent Auditor’s Report 52 Information for shareholders 90 Investment Portfolio 14 Ten-year record 92 Contribution Analysis 14 Equity Portfolio Listing 15 Non-core Assets 18 Investment in Operating Subsidiary Company 19 Costs and Performance Measures 20 Risk Management 22 Corporate Responsibility 26 I STRATEGIC REPORT II III OUR PERFORMANCE IN 2017 The Equity Portfolio outperformed its target, producing a FINANCIAL HIGHLIGHTS total return of 18.0%1 compared to the MSCI ACWI† which returned 13.8%. 2017 has been a transformational year for Alliance Trust. Following the strategic review in 2016, and shareholder SHARE PRICE (PENCE) approval of the Board’s proposals, the Trust has successfully transitioned to a new approach – a global alliance of high-conviction equity managers – aiming to achieve 746.5p 17.0% more consistent outperformance at a competitive cost, 800 746.5 while maintaining a progressive dividend policy. 700 638.0 600 Performance since 1 April, when the new investment approach 517.0 478.9 was adopted, has been encouraging and the Board believes 500 450.1 the foundations are in place to deliver strong and sustainable 400 performance for shareholders for generations to come. 300 200 • Share price at 31 December 2017 was 746.5p, up 17.0% from 638.0p at 31 December 2016 100 0 • Net Asset Value (NAV) per share at 31 December 2017 was 2013 2014 2015 2016 2017 777.7p2, up 16.5% from 667.5p2 at 31 December 2016 Source: FactSet. • Total Shareholder Return1 for 2017 was 19.2% (2016: 26.4%) • Ongoing Charges Ratio (OCR)1 for 2017 was 0.54%, or NET ASSET VALUE (PENCE)2* 0.62% from 1 April when our new investment approach was adopted. The higher percentage reflects the new investment approach, higher buyback activity in the first 16.5% quarter and a lower NAV. We remain below our maximum 777.7p OCR target of 0.65% 800 777.7 700 667.5 • The Board has delivered on its commitment to execute share 600 544.8 559.0 buybacks when it believes it is beneficial to shareholders 516.5 500 to do so. In addition to the purchase from Elliott, the Trust purchased 49.6m shares at a cost of £339.7m 400 300 • The Trust now has over 50 years of consecutive 200 2 dividend growth with total ordinary dividend for 100 2017 at 13.16p, an increase of 3% compared with 0 2016 ordinary dividend of 12.774p 2013 2014 2015 2016 2017 Source: FactSet and WTW. *Including income and with debt at fair value. • The Equity Portfolio aims to outperform the MSCI All Country World Index (ACWI) by 2% per year after costs over rolling three-year periods. It achieved this in 2017 with a Total Return of 18.0% (2016: 22.9%), compared to the MSCI ACWI ONGOING CHARGES RATIO (%)1 at 13.8% (2016: 29.4%) Our other Key Performance Indicators (Total Shareholder Return, NAV Total Return, Equity Portfolio Total Return, 0.54% Discount and Total Dividend) can be found on page 6. 0.8 0.75 1Alternative Performance Measure (refer to Glossary on page 89). 0.7 0.60 0.59 2UK GAAP Measure. 0.6 0.54 †See Glossary on page 89. 0.5 0.43 0.4 0.3 0.2 0.1 0.0 2013 2014 2015 2016 2017 Source: Alliance Trust and WTW. Alliance Trust PLC | Annual Report and Financial Accounts 2017 1 CHAIRMAN’S STATEMENT This has been a transformational year for Alliance Trust, 1,015,198 Liontrust shares in April 2018, which are subject to a as the new approach to managing our equity portfolio was one-year lock-up. When ATI was sold, it was expected that the approved by shareholders and implemented in the spring. net proceeds of the sale would be not less than £25m, before The early investment performance achieved by this new any future contingent consideration. We now expect that the approach has been encouraging against the backdrop of world net proceeds will be not less than £35m, before any future markets which have been characterised by macro-economic contingent consideration. and political uncertainty. That said, it is still early days and Since the new approach was implemented, the Board has all of us at Alliance Trust recognise our commitment to invest received regular updates from WTW in order to assess its for generations. We look forward with confidence to the progress. We have also hosted a number of events in conjunction opportunities and challenges that 2018 will bring as the with WTW and refreshed our communications materials in new approach becomes more familiar to the market and order to provide relevant updates to our shareholders. we develop our track record. A small Executive function was established on 1 April which DEVELOPMENTS IN 2017 comprises five members of staff. They provide Company Secretarial services to all Group companies, oversee the work Following the Board’s strategic review of the Trust in 2016, of our outsourced providers and generally support the Board. shareholders voted on the proposed new approach to managing the Trust’s equity portfolio at a General Meeting THE NEW APPROACH in February 2017. We were delighted with the strong support of our shareholders, with over 96% of those who voted being WTW has brought together eight best-in-class* equity in favour of the change. Following a competitive selection managers from around the world who invest only in their process, we appointed Willis Towers Watson (WTW) as highest-conviction ideas (a maximum of 20 stocks, except investment manager to manage the Trust’s portfolio. for in the emerging markets portfolio where around 50 WTW appointed eight equity managers and the portfolio stocks are held). It is the combination of their individual, underwent transition to the new managers during March high-conviction investment ideas, overseen by WTW, that 2017 and the new strategy became effective on 1 April. creates the ‘alliance of best ideas’ approach that we now talk about when referring to the overall equity portfolio. In January, the Board reached agreement with Elliott, then the Trust’s largest shareholder and a related party, Our equity portfolio is targeting outperformance of the to repurchase the shares in which it had a disclosable MSCI All Country World Index by 2% per annum, net of costs, interest (approximately 20% of the Trust’s issued share over rolling three-year periods. WTW selects and manages capital as at December 2016). Approval for this was also the underlying managers and monitors their performance granted at the February General Meeting and the repurchase as well as providing risk management expertise. went ahead, resulting in a reduction in the size of the Trust and By leveraging the scale of Alliance Trust and WTW, total an uplift in the Net Asset Value (NAV) for other shareholders ongoing charges are targeted to be below 0.65%. This is of around 1%, as well as the removal of a potential share highly competitive for an investment trust targeting such overhang. This development has allowed the Trust to move outperformance. forward with a more stable shareholder register. The aim of the new approach is to: As part of the strategic review, Alliance Trust Investments (ATI), our asset management subsidiary which managed the • deliver more consistently our outperformance target; Trust’s portfolio prior to 1 April, was sold to Liontrust Asset • maintain our long track record of growing dividends; and Management PLC at what we believe was a fair price. As part • maintain the Trust’s ongoing competitive cost ratio. of the consideration we received shares in Liontrust, which we sold in January 2018 at a price of 520p per share, representing We still hold some Non-Core investments but are actively a significant return of 55.3% on the price of 334.9p at which reviewing our private equity, funds and mineral right holdings the shares were issued. We are due to receive a further with a view to an early disposal, subject to market conditions. Alliance Trust was one of the earliest investment trusts to be created back in 1888 and we are now combining our strong heritage with an innovative, high-conviction ‘alliance of best ideas’ investment proposition. The foundations are firmly in place for the Trust to deliver strong and sustainable performance as we continue to invest for generations. *As rated by Willis Towers Watson. I STRATEGIC REPORT II III PERFORMANCE IN 2017 REGULATION The Trust has performed well over the year, outperforming This year has seen the introduction of the Key Information the target benchmark. Total Shareholder Return was 19.2%, Document (KID), which is available on our website.