Mark Dampier: 'Witan fund of funds turnaround could have a lesson for Alliance'

Funds of funds often get a bad name, but too much onus is put on their degree of double charging

Several years ago Witan Investment Trust suffered from all sorts of problems, some of which are now assailing Alliance Trust, where poor returns have left the board prey to activist investors. Performance at Witan wasn't good, the discount had widened significantly, and there was a general feeling the trust had seen better days.

Following Harry Henderson's appointment as chairman in 2003, the board decided the portfolio needed overhauling. Jim Horsburgh was brought in as chief executive in 2004 and the trust was restructured, moving management away from Henderson Global Investors and outsourced to specialist managers. A few years later and the trust started to see a pick-up in performance, yet there was still work to be done.

Andrew Bell took over as chief executive in 2010, repositioning the portfolio with a view to improving performance. By blending managers adopting a variety of investment styles, Mr Bell aims to deliver long-term income and capital growth, while smoothing out the volatility normally associated with a single manager. External fund managers currently run 90 per cent of the trust and the results have been encouraging under the new manager's stewardship.

Patient investors have certainly been rewarded. After trading at an average discount to net asset value (NAV) of around 9 per cent over the past five years, this has narrowed considerably over the past year, reflecting the strengthening performance and the manager's increasing focus on active management. The company had still been buying back shares last autumn, meaning a colossal 49 per cent of shares have been repurchased over 15 years. However, new shares were issued at a premium to NAV in December and early this year. At the time of writing, the trust trades on a premium of 0.14 per cent.

We recently met the manager to discuss the trust's performance over the past year. According to Mr Bell, most of the trust's underlying fund managers have outperformed their respective benchmarks over the period. In keeping with his long-term approach, no changes have been made to the underlying managers over the course of the year. This is an approach I most certainly agree with. In my view, some managers who run multi-manager portfolios chop and change far too often.

Elsewhere, the trust's use of gearing (borrowing to invest) has also contributed to performance. Mr Bell has tended to increase gearing during times of market weakness and this has helped enhance returns when stock markets rise. Increasing gearing during periods of market weakness may sound an obvious strategy, but it is much harder to do in practice. At present, gearing stands at 13 per cent.

Mr Bell manages up to 10 per cent of the portfolio directly. He believes this provides a greater opportunity to add value for shareholders, and this portion generally invests across three areas: assets in which the underlying fund managers would not naturally invest, such as private equity funds; specialist funds or investment areas, such as single-sector funds; and lesser-known or up-and-coming managers that show promise.

The BlackRock World Mining Trust currently features in this portion, but it has been one of the trust's poorer performers. Mr Bell initiated a position in the trust last September. However, the timing of this purchase was unfortunate – the trust was affected by continuing falls in mining shares, while an investment in the company's portfolio had to be written off and lost its value. That said, I can hardly blame Mr Bell for being tempted by this undervalued and out-of-favour sector.

Funds of funds often get a bad name, partly due to their degree of double charging. In my view, far too much onus is put on these charges and, regardless, many multi-manager funds have performed exceptionally well over the long term.

Asset allocation is notoriously hard to get right. By and large, I prefer Mr Bell's approach of trying to identify and invest in good managers, with a focus on of out-of-favour sectors and geographical areas. Perhaps there is a lesson here for Alliance Trust.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk