AN INVESTMENT trust that doubled its outperformance target as part of a major revamp that took place just under two years ago failed to match the performance of its benchmark index in the year to December 2018.

Dundee-headquartered Alliance Trust, which has £2.6 billion of assets, generated a negative net asset value total return of 5.4 per cent over the 12-month period while the MSCI All Country World Index returned -3.3%. Its equity portfolio, meanwhile, which represents 97% of the trust, fell by 4.2% before taking account of asset management fees.

When they moved it to a multi-manager investment approach in April 2017, the trust’s board told investors they could expect its equity portfolio to outperform the index by at least two percentage points net of costs on a rolling three-year basis, up from one percentage point under the old regime.

Trust chairman Lord Smith of Kelvin, who oversaw the revamp after the fund fell victim to activist investor Elliott Advisors, said that despite failing to match its index during the 12 months under review the trust’s equity portfolio has outperformed by one percentage point since the new managers took over.

“2018 was a challenging year for global equities, with most markets falling and many active investment managers struggling to outperform,” Lord Smith said.

“Like others, we trailed our benchmark, partly due to market returns during much of the year having been driven by a narrow group of very large companies.

“Although a number of our eight managers owned some of these companies and benefited from their share prices appreciating, others avoided them because they thought they were overvalued.”

The five stocks that detracted most from performance, all of which are American, were infrastructure provider CommScope, food company Hain Celestial Group, electronics manufacturer Flex, computer hard drive manufacturer Western Digital and financial services business Amerprise Financial. Those that contributed the most - Amazon, Salesforce, Microsoft, HCA Healthcare and UnitedHealth Group - were also all American, with close to half the trust’s assets invested in US businesses.

Away from its equity portfolio, the trust continued to sell off its non-core assets during the year, disposing of a number of private equity holdings to PineBridge Investments in December. That has left the trust with just £14.8m of private equity investments, which will be marketed alongside its North American mineral rights this year.

The most significant disposal agreed during the year was the sale of Alliance Trust Savings, the wholly owned investment platform that made a loss of £19.3m in 2017. After the value of the platform was written down by £23.5m during that year, the trust agreed to sell both its Dundee building and the savings platform to Interactive Investor for £40m.

That deal is still subject to regulatory approval and Lord Smith said the sale price is subject to “some post-completion adjustments”, but when it completes the net proceeds will be invested in global equities.

Despite predicting more volatility for the year ahead, Lord Smith said that the trust’s “concentrated, best-ideas approach should be well positioned to take advantage of volatile markets”.

“Having worked at a range of large investment management firms before starting or joining their current businesses, the trust's stock pickers all have extensive experience of a wide variety of market environments over many years, including both bull and bear markets,” he said.

“They are, therefore, highly skilled at identifying companies with attractive earnings prospects relative to their perceived market value.

“We have a high degree of confidence in their abilities to identify the winners and we have already heard from several of our managers that increased volatility is presenting them with opportunities to invest in what they regard as undervalued stocks.”

The trust’s discount widened slightly during the year, from 4% to 4.9%, while dividends were up by 3% to 13.55p per share.