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RESILIENT PERFORMANCE

In the year to 31 December 2022, the Company’s Net Asset Value (NAV) Total Return was -7.1 % (2021: 18.6%), outperforming our benchmark index, the MSCI ACWI which returned -8.1% (2021: 19.6%). The Company’s Total Shareholder Return (TSR) was -5.8% (2021: 16.5%), as the discount to NAV at which the shares traded narrowed. The average TSR of the AIC Global Sector peer group was -23.2%.

Our portfolio’s longer term returns also compare well with our peers. Between 1 April 2017, when we adopted our multi-manager strategy, and 31 December 2022, the Company’s TSR was 54.7% against the average share price return of the AIC Global Sector peer group of 41.2%. We estimate that anyone investing £100 in April 2017 will have seen the value of their investment grow to £155 if they had reinvested their dividends.

The Board is satisfied that the Company’s long-term performance has been consistent with its objective of delivering real returns and a rising dividend. It is also pleased with the performance versus peers. The only disappointment is that the Company has not yet outperformed its benchmark index by the target set when the investment strategy was adopted on 1 April 2017.

As part of its annual review of the performance of the Investment Manager, the Board also considered WTW’s performance over the first five-year period since its appointment. The main findings of the review reinforced the Board’s judgement that the investment strategy is sound, and the Board continues to endorse WTW’s investment approach.

INCREASED DIVIDEND

The Board has declared a fourth interim dividend of 6.0p per share which brings the full year dividend to 24.0p. Following the step up in dividend levels from the second half of 2021, this is a 26% increase on the prior year and the 56th consecutive annual increase in the ordinary dividend. With a share price of 948.0p at year end, the full year dividend represents a yield of 2.5%. Following a year of particularly high income from certain stocks in the portfolio, I am pleased to report that Earnings Per Share (‘EPS’) for the year ended 31 December is 26.14p per share (2021: 15.48p). Given this high level of earnings in 2022, the Board has taken the opportunity to take advantage of the Company’s structure as an investment trust and add to the Company’s already significant distributable reserves.

BORROWING AND GEARING

There were no major changes to the Company’s long-term borrowing arrangements during 2022. As market interest rates rose, the value of the fixed rate loans on the Company’s balance sheet declined resulting in a higher NAV, thus enhancing overall performance for the year.

STABLE DISCOUNT

As shareholders are aware, one of the Board’s strategic objectives is the maintenance of a stable discount. The Company’s average discount over the year was 5.9%, equal to that of the prior year. As at 31 December 2022 the Company’s discount was 4.2% (2021: 5.3%). This compared favourably with the average discount for the AIC Global Sector of 7.4% as at the year end. During the year under review, the Company bought back 15.5 million shares. These share buybacks helped to support the stability of the discount and enhanced the NAV Total Return by 0.3%. The Board will continue to use share buybacks as appropriate, and invest in promotional activity, such as investor events, designed to raise the Company’s profile, to support the management of the discount. We hope, in time, to convert our discount into a premium as the benefits of our long-term strategy gain wider recognition.

STRENGTHENED OPERATING MODEL

As previously announced, we made some operational changes at the end of 2022 which were the outcome of the work undertaken by the Board to strengthen the Company’s operating model. Juniper Partners Limited (‘Juniper’) has been appointed as Company Secretary and will also provide finance, fund administration and accounting services to the Company from 1 April 2023. WTW was also appointed to provide further marketing, public relations, and investor relations services. The changes will benefit shareholders by reducing risk in the Company’s operating model and should also enhance the Company’s communications. The Board is pleased that despite the changes, it has been able to continue to work with members of the Company’s Executive team in their new roles with either Juniper or WTW.

BOARD SUCCESSION

As part of our succession planning, we have made a number of changes to the Board over the past three years. The most recent of these being the appointment of Vicky Hastings and Milyae Park to the Board in September 2022. Vicky has extensive experience in fund management, both as a fund manager and business leader, while Milyae’s diverse career spans financial services, retail, and technology. They have brought further diversity of skills and fresh perspectives to the Board.

I would like to express my thanks to Anthony Brooke for his significant contribution to the Board over the past seven and a half years. Anthony joined the Board in 2015 and will complete his tenure at the Annual General Meeting on 27 April 2023.

PORTFOLIO WELL POSITIONED FOR UNCERTAIN ECONOMIC OUTLOOK

The outlook for the global economy remains highly uncertain and equity markets remain volatile. If inflation and interest rates have peaked in the US and the UK, as some analysts believe, and the war in Ukraine comes to an end, equity markets may rally. On the other hand, they may fall further if we descend into a deep recession. Coherent arguments can be made for both a bull and a bear case. The good news is that the success of our investment strategy does not hinge on macroeconomic outcomes. Regardless of the immediate outlook, our Stock Pickers remain resolutely focused on finding excellent businesses with exciting prospects. The speculative froth topping the valuations of many growth stocks has been blown away by higher interest rates and harsher economic conditions. We now look forward to the possibility of company fundamentals, not sentiment, driving share prices, if not for the short term, certainly in the long run.

Gregor Stewart
Chairman
8 March 2023

INVESTMENT MANAGER’S REPORT

“AN ISLAND OF STABILITY”

The Collins Dictionary’s word for the year is “permacrisis”, a portmanteau of “permanent” and “crisis”. It seems appropriate, as the world has lurched from one unprecedented event to another in the past few years. First Brexit, then the Covid pandemic, quickly followed in February last year by Russia’s invasion of Ukraine. The return of a land war to Europe began to reshape geo-politics and triggered sharp rises in food and energy prices, adding to inflationary pressures already building due to supply chain disruption and ultra-loose monetary policy linked to Covid. Interest rates decisively reversed direction, finally ending the cycle of rate reductions that began in the Great Financial Crisis. It hardly needs to be said that 2022 was one of the toughest environments on record for investors. It was also a year in which it was difficult for investment managers focusing on bottom-up stock picking to add value.

Not surprisingly, most asset classes delivered negative returns. With the war driving up energy and raw materials prices, only commodities bucked the downward trend.

The Company’s benchmark, the MSCI ACWI, which includes developed and developing markets, returned -8.1% during the year. The Company’s NAV Total Return also fell but was more resilient than the benchmark returning -7.1%, while a narrowing of the discount meant that TSR declined by 5.8%. The portfolio therefore outperformed the index in a challenging market environment. It also declined in value by a lot less than those investment trusts with a growth-style bias which have led the way in recent years. In the words of one analyst, Alliance Trust was “an island of stability”.¹

1. Source: Quoted Data.

GROWTH STOCKS LED MARKET DECLINE

Within the equity market, previously high-flying growth stocks in the US suffered some of the sharpest declines. Having contributed the most to performance in prior years, stocks such as Meta, Tesla, Alphabet, Microsoft, Amazon and Apple, accounted for approximately half of the decline in the MSCI ACWI in 2022.² Lesser-known growth stocks, such as Shopify, Snap, and DocuSign also suffered steep declines in value. Meanwhile, defensive, and less glamorous value stocks generally did well, though measuring returns in aggregate by investment style masked what was largely a switch in fortune between the technology (‘tech’) and energy sectors, with the latter soaring in value. The about-turn in sector performance is easily explained by the abrupt reversal in the interest rate cycle since late 2021/early 2022. Higher borrowing costs dented optimism about the future earnings potential for many ‘jam tomorrow’ tech companies, while soaring prices for commodities boosted near-term cash flows and profits for ‘jam today’ energy and raw materials companies. On a country basis, the UK stock market did relatively well last year, with the FTSE 100 managing a modest gain of 0.9%, due to its concentration of energy and raw materials companies. Chinese equities fell significantly, as its economy remained semi-closed through much of the year due to persistent Covid lockdowns, though these had begun to ease by the end of 2022 because of public pressure.

2. Source: WTW, FactSet.

BALANCED STOCK EXPOSURE HELPED PERFORMANCE

The portfolio’s outperformance versus the market and most peers in 2022 stemmed from maintaining a balanced exposure to countries, sectors, and styles, and focusing on stock picking as the primary source of returns, although having slightly more money in aggregate invested in the UK than the index added value. In addition, the Company’s NAV Total Return benefitted over the period from the decline in the fair value of the Company’s fixed rate debt with rising bond yields. Offsetting some of this benefit was the impact of the portfolio being geared in a falling market as you can see from the table below.

CONTRIBUTION ANALYSIS (%)

Source: WTW, Bank of New York Mellon. Data as at 31 December 2022.

Whereas in previous years, our diversified stance had held back performance versus the market and many growth-style peers, due to the concentration of returns in a handful of expensive US growth stocks, in 2022 it enabled us to avoid the worst of the tech rout and, at the same time, benefit from the recovery in energy stocks. Not owning Tesla and Apple boosted relative returns versus the index, and although we continue to own some other fallen growth stars such as Amazon, salesforce.com and Alphabet, the relative modesty of our exposures helped to contain the damage. The oil companies ExxonMobil in the US (held by GQG Partners ‘GQG’), BP in the UK (held by Jupiter Asset Management ‘Jupiter’) and Petrol Brasileiro (‘Petrobras’) in Brazil (held by GQG) were among the biggest contributors to relative returns. Our Stock Pickers also found winners in defence, where BAE Systems (held by Veritas Asset Management ‘Veritas’) and Booz Allen Hamilton (held by Black Creek Investment Management ‘Black Creek’) benefitted from rising demand due to increased government spending. Our positions in healthcare and financials, with US-based UnitedHealth Group (held by GQG and Veritas), and Indian bank HDFC (held by GQG) also boosted returns.

In terms of the Stock Pickers, GQG contributed most to the portfolio’s outperformance, having correctly timed its exit from many overpriced tech stocks in 2021 and increased its exposure to cheaper energy companies. Jupiter and Black Creek, which both have a bias towards value stocks, also did well, while the Stock Pickers with a growth-style bias, such as Sands Capital (‘Sands’) and Sustainable Growth Advisors (‘SGA’), which had performed well in prior years during the growth boom, were hit by the deratings of many of the stocks that they owned. We retain high conviction in the skill of both Sands and SGA to add value to the portfolio in the longer term, even though many of the stocks that they own may have been out of favour during 2022.

TOP 5 STOCK CONTRIBUTORS AND DETRACTORS TO RETURN RELATIVE TO BENCHMARK IN 2022

Top 5 contributors

Source: WTW, The Bank of New York Mellon, FactSet. Data as at 31 December 2022.
Average active weight is the average difference between the weight of the stock in the portfolio and the weight of the stock in the benchmark over the period.

PORTFOLIO TURNOVER REFLECTED NEW OPPORTUNITIES

Our role as Investment Manager is to select the best Stock Pickers available globally and blend them together into a balanced portfolio, reallocating capital between them where necessary to control risk. We consciously did not change the strategic stance of the portfolio during the year, although we terminated River and Mercantile Asset Management’s (‘R&M’) mandate in March due to a change in corporate ownership which we thought could undermine the firm’s investment culture. At the time, R&M’s relatively small allocation accounted for approximately 6% of the portfolio. This capital was redistributed to existing Stock Pickers with similar investment approaches, principally Jupiter and Black Creek, to retain the portfolio’s overall style balance, although some of the capital also went to GQG.

Stock Picker weights evolved naturally during the year due to share price fluctuations and there was some turnover in positions by the Stock Pickers, most notably GQG’s shift between sectors. Total stock turnover was 56.7%, partly due to the reallocation of R&M’s capital, without which it would have been below 50%. At that level, stock turnover equates to an average two-year holding period. This may seem short for an investment approach focused on investing for generations. However, last year was anything but normal. The volatility of share prices created many new opportunities and our Stock Pickers actively exploited them.

Examples of outright sales in 2022 included Novo Nordisk, which was disposed of by SGA and replaced with ICON. ICON is a leading contract research organisation specialising in the strategic development, management, and analysis of programs that support clinical development. ICON’s scale enables it to expedite the clinical trial process and provide more comprehensive offerings, allowing it to charge premium prices.

Sands purchased Keyence and sold Twilio. Twilio, a California-based business selling communication tools, was sold due to weakening fundamentals, indications of a deteriorating competitive position, and waning confidence in management’s execution. Keyence is a leading designer of high-end factory automation sensors and sensor systems. Despite the tech sell off, Sands expects the company to maintain its leadership position as it expands into new industries, solutions, and applications over the next decade, that should hopefully result in sustained above-average earnings growth.

Vulcan Value Partners (‘Vulcan’) added CBRE Group and General Electric Co. (‘GE’) to the portfolio. CBRE is the largest commercial real estate services provider in the world, with over 100,000 employees generating $17bn of net revenue. CBRE serves both corporate occupiers of real estate and real estate investors. GE is an industrial company that operates in aviation, healthcare, renewal energy, and power. Vulcan believes that GE’s management has made considerable progress in simplifying the company’s structure and de-risking the balance sheet.

Black Creek sold Nutrien, the world’s largest crop nutrient company, whose share price increased sharply as fertiliser prices rose to all-time highs, and purchased Stericycle, a leading global provider of regulated waste disposal services to businesses. Black Creek was attracted by Stericyles’s valuation, which is temporarily depressed as it goes through a multi-year restructuring programme which will leave it stronger in the long run.

The portfolio’s positioning at the end of the year remained broadly neutral versus the benchmark across countries, sectors, and styles. Even so, the portfolio was marginally overweight in the UK and in industrials where some of our Stock Pickers see opportunities from investment in new capacity. The portfolio was also underweight in the US. These overweight and underweight sector/country positions were the byproducts of bottom-up stock selection versus top-down allocations and were well within our risk tolerance. Despite top-down similarities, the portfolio was vastly different to the index in terms of stocks, with an Active Share of 79%, ensuring stock selection drives relative returns.

UNCERTAIN MARKET OUTLOOK

After a tough year for investors, it may be tempting to think that the worst of the bear market is over. However, we expect continued economic uncertainty to produce more market volatility. On the positive side, there are some encouraging signs that inflation pressures may have peaked in the US and UK. This means we may be approaching the end of the cycle of rising interest rates. If that is the case, it is plausible that the global economy could achieve a soft landing, in other words a cyclical slowdown that avoids a deep and widespread recession. But a hard landing seems just as likely if interest rates remain at current levels and corporate earnings fail to meet optimistic expectations. Hence gross gearing at year end was 7.8%, at the lower end of our typical 7.5-12.5% range, reflecting our caution about the market outlook.

We believe the Company’s portfolio is well positioned, with balanced exposure to stocks that can survive, and even thrive, in the current high inflation environment, as well as many companies who are financially strong enough to weather a recession. We also have exposure to many high-quality cyclical stocks with temporarily depressed valuations that could benefit disproportionately from an economic rebound. This reflects the fact that our approach does not attempt any big calls on the future direction of the market. We believe there are potential mispricing opportunities across the market, whether it is among growth stocks that have been oversold or value stocks whose earnings prospects are underappreciated. Our goal is simply for our Stock Pickers to pick the right companies with the best long-term opportunities for superior returns.

FUNDAMENTALS DRIVE RETURNS IN THE LONG TERM

We are reassured that, altogether, the portfolio has more attractive characteristics than our benchmark, namely a lower valuation, a higher dividend yield and more stable projected earnings growth. We also take comfort from empirical evidence that, notwithstanding short-term fluctuations due to changes in market sentiment, share prices follow company fundamentals in the long run.

It is notable that since our appointment on 1 April 2017, the price appreciation achieved through improvements in the underlying businesses of portfolio companies, as opposed to changes in market sentiment, is much greater than that of the benchmark. By contrast, the benchmark has benefitted disproportionally in recent years from over-excitement about the earnings potential of fashionable high tech growth stocks.

As the more challenging economic environment forces investors to become increasingly hard-headed in their assessment of corporate prospects, we believe that the fundamentally strong companies in the Company’s portfolio, whether they are classified as growth or value or something in between, will gain greater recognition. Since the adoption of the multi-manager approach on 1 April 2017, after all costs, the NAV Total Return has performed in line with low-cost passive products and has outperformed the AIC Global Sector. Given that market returns are no longer as concentrated as they have been in recent years we are growing more confident that we will outperform the benchmark from here. It is a trite analogy, but we believe that a slow and steady pace wins the investment race, even if it lacks the excitement and bursts of speed associated with more adventurous strategies. We aim to offer investors a smooth path to the finishing line.

RESPONSIBLE INVESTMENT:
THE ALLIANCE TRUST APPROACH

As stewards of approximately £3bn of assets, we apply high standards of Responsible Investment to managing the investment portfolio on behalf of shareholders. Environmental, Social and Governance (ESG) factors can all have a significant impact on the Company’s ability to deliver growth in capital and rising dividends. ESG risk factors are therefore integrated into the investment processes by the Company’s Investment Manager, Willis Towers Watson (WTW), to protect financial returns. WTW has a rigorous approach to Responsible Investing:

1. WTW conducts due diligence on the Company’s Stock Pickers to ensure they have a long-term mindset, exercise voting rights and engage with companies on ESG considerations.

2. WTW has appointed EOS at Federated Hermes (EOS), a renowned stewardship specialist, to provide an additional layer of engagement with companies, policy makers and regulators. With over $1.6 trillion¹ under advice, this gives EOS more weight when lobbying for profitable change than one Stock Picker would have as a standalone investor.

3. WTW monitors the portfolio and challenges the Stock Pickers when it feels their analysis could be improved, particularly in relation to climate change. WTW has extensive resources in this area, comprising 90 specialists analysing company-by-company the financial implications of climate change.
   
   

1. Source: https://www.hermes-investment.com/uk/en/institutions/eos-stewardship/eos-team/

TARGETING NET ZERO GREENHOUSE GAS (GHG) EMISSIONS

Climate change poses significant risks to investment returns from many companies, which is why the Company has pledged to have its assets managed to achieve Net Zero by 2050 at the latest, with an interim target of reducing portfolio emissions by 50% by 2030, relative to 2019.

However, the transition to Net Zero by 2050 will not be linear. There will be times when it will be attractive to invest in innovative companies developing solutions to climate change. But there will also be times when it will make financial sense to buy mispriced shares in traditional energy companies. We benefitted last year from GQG correctly seeing in 2021 that the shares of many traditional energy companies were trading well below levels that were justified by their future profitability. Increased allocations to high-emitting stocks such as Heidelberg Materials, ExxonMobil and Petrobras, among others, meant that overall portfolio emissions rose year-on-year. However, the weighted average carbon intensity (which measures carbon emissions as a proportion of revenue) ended the year lower than the index. Although there was a handful of stocks driving up portfolio emissions last year, two-thirds of the portfolio holdings by weight were either on or transitioning towards a clear path to Net Zero. The key to tackling the laggards is to engage and keep encouraging them in the right direction.

GQG, as a responsible owner of ExxonMobil, for example, made two specific engagements in the past 18 months. During these discussions, GQG urged ExxonMobil to improve its climate disclosures, as it believes that ExxonMobil is investing in de-carbonisation more widely than is appreciated. GQG is encouraged that three new directors with sustainability expertise have been appointed to the ExxonMobil board of directors and that ExxonMobil announced its ambition for Net Zero greenhouse gas emissions by 2050. GQG has also recently engaged with Petrobras on our behalf.

In addition to GQG’s efforts with these companies, EOS has an ongoing programme of engagement with them and some of the world’s largest emitters of greenhouse gases, arguing for more sustainable long-term business models, reductions in greenhouse gases and improved governance and disclosure. EOS plays a key role in support of Climate Action 100+¹, an investor led initiative with the support of over 700 investors, representing more than $68 trillion² of assets under management that aims to ensure the world’s largest corporate greenhouse emitters take the necessary action on climate change.

Climate Action 100+¹ is engaging with 166 companies, accounting for over 80 percent of global corporate industrial greenhouse gas emissions. While many of these companies are improving their disclosures, and embracing Net Zero commitments, their real-world activities are not yet sufficient to shift their business models to align with Net Zero goals. This demonstrates the need to continue to escalate engagement activity with the highest emitters to ensure Net Zero goals are met. As the transition gains momentum, EOS will continue to engage with such companies to ensure that they recognise the reality of a Net Zero economy, that they factor this into their financial and strategic planning, and that they deploy capital to address the risks and capture the opportunities presented by the transition.

1. https://www.climateaction100.org/
2. Source https://www.climateaction100.org/about/

ENGAGEMENT TO DRIVE POSITIVE CHANGE

As well as engaging on climate change, we, together with EOS and our Stock Pickers are also focused on a wide range of governance and social issues. These issues get less scrutiny by regulators concerned about greenwashing and are not always as easy to assess with data. It is, however, possible to address them through engagement.

For example, Jupiter successfully engaged with Bayer, the German listed pharmaceutical, consumer health and agricultural sciences company, to help persuade the CEO to step down after a series of missteps by voting against management, supervisory boards and the remuneration report. Metropolis Capital (‘Metropolis’) engaged with News Corp over the company’s use of a “poison pill” provision to prevent activist investors, competitors or other potential acquirers from taking control of the company. The provision had never been voted upon by shareholders. Following feedback from investors, including Metropolis, News Corp terminated the provision.

Sands challenged Entegris on how it sources materials and tools for semiconductor manufacturing. Semiconductor companies have exposure to conflict minerals such as tantalum, tin, tungsten, and gold, given that many of these are integral components of manufacturing electronic circuits. Sands is encouraged that Entegris has hired a senior employee to enhance its public disclosures and responsible mineral sourcing and is transitioning away from materials sourced from Russia.

In addition to engagements by the Stock Pickers, EOS engaged with 103 companies within the Alliance Trust portfolio on 493 issues and objectives throughout the year. Of these engagements, the environmental category accounted for 27% of total engagement, with 75% of environmental engagements relating to climate change.

Meanwhile, our Stock Pickers voted on all voteable proposals, casting votes on 3,444 resolutions at investee company meetings. Of these resolutions, they voted against company management on 323 and abstained from voting on 109 occasions. Of the key votes against management, the issues voted on were governance-related issues such as remuneration and director election.

OUR STOCK PICKERS

HOW WE MANAGE THE COMPANY’S PORTFOLIO

We have overall responsibility for the management of the Company’s portfolio. We have built and manage a team of diverse, best-in-class¹ Stock Pickers, each of whom invest in a bespoke selection of typically 10-20 of their ‘best ideas’. ‘Investing For Generations’ is the backbone of the philosophy of the Company. It brings long-term principles into how we invest your money, including ESG considerations. This helps us define our investment approach, ensuring that the Stock Pickers’ thinking and practices are aligned with the core beliefs of the Company and that they invest responsibly. We consider this a key factor for long-term success.

HOW WE CHOOSE OUR STOCK PICKERS

We aim to forge abiding partnerships with our Stock Pickers, enabling them to focus on what they do best. Our Stock Pickers are focused on the long term and do not necessarily look at volatility as a risk, but more as an opportunity: risk is more associated with the permanent loss of capital. There was one change to the Stock Picker line up in 2022. R&M’s mandate was terminated after a change in ownership. We were concerned that this could prove a distraction for the investment team. The capital allocated to R&M was redistributed among the remaining Stock Pickers with similar characteristics to retain balanced exposure to different styles of investment, sectors and regions. We are, however, always on the lookout for new Stock Pickers and the advantage of the multi-manager structure is that we can easily change the line-up without disrupting the whole portfolio.

We invest significant time, research and effort in identifying Stock Pickers for the Company’s portfolio, leveraging our extensive research network, robust process and expertise. Our approach involves identifying the skills and characteristics we believe are essential in good Stock Pickers. We believe the key to identifying tomorrow’s high-performing Stock Pickers lies in extensive due diligence combined with qualitative and quantitative analysis. This due diligence focuses on:

• the investment processes, resources and decision-making that make up the Stock Picker’s competitive advantage;

• the culture and alignment of the organisation that leads to sustainability of that competitive advantage;

• their approach to responsible investment. We aim to appoint Stock Pickers who actively engage with the companies in which they invest and have an effective voting policy. When necessary, we challenge the Stock Pickers and guide them towards better practices; and

• the operational infrastructure that minimises risk from a compliance, regulatory and operational perspective.

We do not believe that quantitative assessments on their own provide enough information to give us an advantage in assessing the potential of a Stock Picker to outperform. Our Manager Research team formulates a view on each Stock Picker we seek to rate over a series of meetings. We look beyond past performance numbers to try to understand what ‘competitive edge’ each Stock Picker has and whether that edge is likely to be sustainable in the future. We dig deeper into the investments made by each Stock Picker using a case study methodology to understand the depth of fundamental analysis involved in investment decisions. We look at matters such as the team’s process for selecting stocks, adherence to this process through different market conditions, relevant team dynamics, training and experience as well as performance track record. We see the track record as just a single data point and, without the context of the additional data we assess, it is unlikely to persuade us that a Stock Picker is skilled. Our expectation of success further rises where we engage with Stock Pickers to structure bespoke high conviction, concentrated strategies usually of 10 to 20 stocks, at an attractive cost and we believe portfolios are more robust when we diversify across Stock Pickers with differing approaches. High Active Share and concentrated portfolios are advantageous. Academic research supports this². The broadest opportunity set is provided by unrestricted global mandates, to allow skilled Stock Pickers the widest scope.

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

DIVIDEND

DIVIDEND POLICY

Subject to market conditions and the Company’s performance, financial position and outlook, the Board will seek to pay a dividend that increases year on year. The Company expects to pay four interim dividends per year, on or around the last day of June, September, December and March, and will not, generally, pay a final dividend for a particular financial year.

DIVIDEND

As previously noted in the Chairman’s Statement, the Company has increased its total dividend for the year ended 31 December 2022 to 24.00p per ordinary share (2021: 19.05p), a 26% increase on the previous year.

During the year under review, the Board was pleased to be able to pay shareholders a consistent quarterly dividend of 6.0p per ordinary share, being an increase on the corresponding quarterly dividend payments in the previous financial year. The total of the first and second interim dividends represented an increase of 62.1% on the same payments for 2021. Details of the payments can be found below.

The Board is of the opinion that the increased level of total dividend is both sustainable and affordable and it expects to extend the Company’s 56-year track record of annual dividend increases for many years.

The Company’s Dividend Policy (as detailed above), Investment Objective and Investment Strategy all remain unchanged.

The Board aims to continue delivering a rising dividend year after year as well as capital growth. If you had invested £100 in the Company at the start of 1968 and you had reinvested your dividends in additional shares, you would have shares worth £23,926 at the end of 2022, and £5,643 if you did not.

In determining the level of future dividends, the Board will take into account factors such as any anticipated increase or decrease in dividend cover, projected income, inflation and the yield on similar investment trusts.

The Board will continue to take advantage of the Company’s structure as an investment trust and will use both its investment income and its significant accumulated distributable reserves to fund dividend payments.

The Company policy of paying quarterly interim dividends means that shareholders have certainty of the date on which they will receive their income but means they are not asked to approve the final dividend. However, each year shareholders are given the opportunity to share their views on the Company’s dividend by being asked to approve the Company’s Dividend Policy.

INCOME & DISTRIBUTABLE RESERVES

The Company’s income receipts from dividends in 2022 saw a significant increase to £94.9m (2021: £61.9m). The same level of dividend income may not continue in 2023.

The Company’s distributable reserves at 31 December 2022 were £2.9bn (2021: £3.3bn). Of these, the Company’s revenue reserve was £102.3m (2021: £95.2m), realised capital reserves were £2.7bn (2021: £2.8bn) and unrealised capital reserves were £0.1bn (2021: £0.5bn). Both elements of the capital reserves are readily convertible to cash.

FOURTH INTERIM DIVIDEND DECLARATION

A fourth interim dividend of 6.0p per ordinary share will be paid on 31 March 2023 to shareholders who are on the register at close of business on 10 March 2023. The fourth interim dividend will be fully paid from income, with no requirement to utilise revenue reserves.

ONGOING CHARGES & DISCOUNT

ONGOING CHARGES¹

The Company’s Ongoing Charges Ratio (OCR) marginally increased to 0.61% (2021: 0.60%). Total administrative expenses were £6.5m (2021: £5.9m) and investment management expenses were £12.8m (2021: £14.1m). The Board has a policy of adopting a one-quarter revenue and three-quarters capital allocation for management fees, financing costs and other indirect expenses which is consistent with the Association of Investment Companies (AIC) Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts. The Company’s costs remain competitive for an actively managed multi-manager global equity investment company.

1. Alternative Performance Measure

SHARE BUYBACKS

The Company bought back 5.0% of its issued share capital during the year, purchasing 15,537,581 shares for cancellation. The total cost of the share buybacks was £149.6m. The weighted average discount of shares bought back in the year was 6.3%. All the shares bought back were cancelled. Share buybacks contributed a total of 0.3% to the Company’s NAV performance in the year.

DISCOUNT¹

One of the Company’s strategic objectives is the maintenance of a stable share price discount to Net Asset Value.

During the year under review, the Company’s share price traded at an average discount of 5.9%.

As at 31 December 2022, the Company’s share price discount was 4.2% (2021: 5.3%). The average discount (unweighted) for the AIC Global Sector was 7.4%.

HOW WE MANAGE OUR RISKS

STRATEGIC OBJECTIVES

The strategic objectives of the Company are to:

• Consistently meet the investment performance targets set by the Board;

• Continue its policy of paying a progressive dividend;

• Maintain a stable discount; and

• Provide good value to its shareholders.

The Board determines the levels of risk that it is prepared to accept to achieve the Company’s strategic objectives. It then monitors whether there is a possibility of any of these risk levels being breached (through Early Warning Indicators, or EWIs) and, if there is, it will take action to bring the level of risk back within the EWI it has set. During the year, the EWI’s were reviewed to ensure they remained appropriate. No changes were made to the list of EWIs.

At the year end, there were three measures which triggered their EWIs. Details of which are as follows:

Portfolio Performance: The EWI was triggered due to the underperformance of the portfolio against the MSCI ACWI over a rolling three-year period.

Portfolio Turnover: The EWI was triggered as a result of increased turnover due to Stock Picker changes and trading in the portfolio when Stock Pickers took advantage of opportunities in the market.

Operational Risk: The EWI was triggered as a result of factsheet errors. Additional controls have subsequently been put in place to mitigate the risk of future errors being made.

PRINCIPAL AND EMERGING RISKS

In common with other financial services organisations, the Company’s business model results in inherent risks. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company and how these are continuously monitored and managed.

As an investment company, investment risk has the potential to impact the Company significantly. We explain on the next page how we mitigate against the potential impact of this risk. 2022 was a challenging year as a result of geopolitical tension, inflation and the risk of many economies entering into recession, all of which adversely impacted the global economy. The market outlook for 2023 remains highly uncertain as policy makers continue to battle inflation without triggering a deep recession. The backdrop of the war in Ukraine also continues to impact market and investor confidence.

The other area where we see risk evolving relates to ESG. In addition to considering the potential adverse impact of ESG factors on the Company’s reputation and financial performance, a specific climate change risk, along with mitigating activities at Company and portfolio level, is being monitored.

CONSIDERING THE COMPANY’S STAKEHOLDERS (S172 STATEMENT)

The Company’s Directors have a number of obligations including those under section 172 of the Companies Act 2006. These obligations relate to how the Board takes account of a number of factors in making its decisions – including the impact of its decisions on employees, suppliers and the local community as well as shareholders. The Board is focused on its responsibilities to stakeholders, corporate culture and diversity as well as contributing to wider society and takes account of stakeholder interests when making decisions on behalf of the Company. Examples of the principal decisions taken by the Board during the year under review are detailed below.

Shareholders

The Board engages with the Company’s shareholders in a number of ways – at the AGM and investor events; through its investor relations and marketing activities, including meetings between individual shareholders and members of the Board; and via its website, annual and interim reports, newsletters and factsheets. Shareholders had the opportunity to join three investor forums during the year which took place in person and virtually. Details of all future Company events will be made available on our website, www.alliancetrust.co.uk, and all shareholders who have provided us with their email contact details will be sent electronic invitations.

The Head of Investor Relations and Marketing and Broker reported regularly to the Board on meetings with shareholders, sharing their views and also reporting on any changes to the composition of the share register. Shareholders wishing to communicate directly with the Board can do so by contacting the Company Secretary by e-mail or post.

Following the relaxation of Covid-19 restrictions and for the first time in three years, the Board was pleased to welcome shareholders in person to the Company’s AGM. Those shareholders who were not able to attend in person were able to view the meeting and ask questions remotely. The Company’s 135th AGM to be held in April 2023 will have the same facility.

The Company continued to reunite shareholders with ‘lost’ shares and dividends. During the year under review, the Company was able to reunite shareholders with 292,800 dormant shares with a value of £2.8 million and £17,400 of unclaimed dividends.

The Board concluded its work to simplify and strengthen the Company’s operating model. This resulted in the appointment of Juniper as Company Secretary with effect from 31 December 2022. Juniper will also provide finance, administration, and fund accounting services to the Company with effect from 1 April 2023. The Company also appointed TWIM to provide it with further marketing, public relations and investor relations services with effect from 31 December 2022.

The changes to the Company’s operating model have not impacted the management of the Company’s portfolio. The changes will benefit shareholders by reducing risk in the Company’s operating model. In addition, the Company’s communications will benefit from additional input due to the closer proximity between marketing and investment colleagues.

The Board considered the impact of the changes on the Company’s small Executive team. Following the changes to the Company’s operating model, the Board was pleased that the majority of the Executive team joined either Juniper or WTW, apart from one employee who retired. The Board was also mindful of its Dundee heritage of which it is very proud and was pleased that those employees who were based in the Company’s Dundee office will remain there with Juniper having taken over responsibility for the office premises.

The Investment Association maintains a public register of companies who have received significant shareholder opposition to resolutions put to shareholders at general meetings. At the Company’s Annual General Meeting held on 21 April 2022, all resolutions put to shareholders were duly passed with no significant votes against cast.

Employees

During the year under review, the Company had a small Executive team of five people who had all been employed for a number of years. There was therefore no need to seek to recruit staff nor a need to consider any promotions. Should such a requirement have arisen the Company would have based its decisions solely on the individual’s suitability. There was no discrimination on any basis and, should any employee have suffered from a health condition or disability, reasonable adjustments would have been made to allow them to continue to have the same opportunities as any other employee.

The Company had two part-time employees (one male and one female). The most senior employee was female and all other employees reported directly to her. All the employees were British and white. All employees had the flexibility to work from home or in the office. The table below provides the gender, ethnicity and colour split of the workforce of the Company and the Board as at 31 December 2022.

* Chair and Senior Independent Director.

With effect from 31 December 2022, the Company had no employees. This was primarily as a result of the changes made to the Company’s operating model.

Society

The Company and WTW are targeting Net Zero greenhouse gas emissions by 2050 for the Company’s portfolio and aims to reduce emissions over the medium term on a pathway that is consistent with the goals of the Paris Agreement and the principles of the Institutional Investors Group on Climate Change Net Zero Investing Framework. The Board believes that meeting these commitments will improve risk adjusted returns.

The Company has an energy efficient office. However, for most of 2022 staff have been working partly from the office and partly from home. The Board has agreed that the day-to-day business operations of the Company should be carbon neutral and it is Net Zero for its non-portfolio related carbon emissions. The Company encourages electronic communications with shareholders whenever possible and uses certifiably sustainable paper for the Annual Report and its other communications. The Company will continue to seek to minimise the impact of its operations on the environment.

The Company influences how its investee companies operate through its responsible investment activities. The Company’s investment approach takes account of the external impact of investee companies’ activities on the environment, their practices’ social acceptability, and their good governance.

The Board has maintained a limited number of types of investment restrictions. During the year, the Board added a restriction on investment in Russia and Belarus.

The Company considers that it does not fall within the scope of the Modern Slavery Act 2015, and it is not, therefore, obliged to make a slavery and human trafficking statement. The Company considers its supply chains to be of low risk as its suppliers are typically professional advisers. A statement from WTW, the Company’s Investment Manager, on the steps it takes to investigate and mitigate the risk of modern slavery and human trafficking can be found on WTW’s website (www.willistowerswatson.com).

The Company conducts its business honestly, fairly and with transparency and takes anti-bribery measures very seriously. The Company is committed to implementing and enforcing effective measures to counter bribery and corruption and has a zero-tolerance approach to acts of bribery and corruption by Directors, employees or anyone acting on the Company’s behalf. The Company also has zero tolerance for financial crime such as tax evasion or the facilitation of tax evasion.

Community

The Board, while supportive of the aims of many charities, believes that the Company should not divert shareholders’ funds to finance them save in occasional circumstances where there is a close link to the Company or its heritage. The Company has been a supporter of the V&A Dundee since 2015 and made a payment of £50,000 in the year. The Company also provided £200 to fund prizes at Dundee University.

Staff were, if they requested it, given time off work to participate in charitable activities or to allow them to support the charities in which they are involved.

Service Providers

The Company has outsourced various activities, not least, the management of the Company’s portfolio to WTW and the responsibilities of safekeeping the Company’s assets to its Depositary and Custodian.

The Company favours working with suppliers on a long-term basis. For material contracts, the Board will normally conduct a tender process with associated due diligence prior to appointment. Where possible, consideration is given to suppliers local to Dundee. The performance of suppliers is subject to oversight by the Board. The Board receives and considers reporting detailing the performance of the Company’s service providers. The Audit and Risk Committee also reviews the performance of the Company’s Auditor and makes recommendation to the Board on its continuing appointment.

The Company complies with its obligations under the Reporting on Payment Practices and Performance Regulations.

Other principal decision taken during the year are as follows:

Success planning

Chris Samuel retired as a Director of the Company following the conclusion of the AGM held on 21 April 2022. Anthony Brooke also informed the Board of his intention to retire as a Director of the Company at the 2023 AGM. In accordance with its succession planning the Company undertook a search for new Directors to join the Board. The Company appointed Cornforth Consulting to assist with this process. Following an extensive review of candidates, including a formal interview process, Vicky Hastings and Milyae Park were appointed as Directors of the Company on 29 September 2022. Vicky has extensive experience in fund management, both as a fund manager and business leader, while Milyae’s diverse career spans financial services, retail, and technology. They have brought further diversity and fresh perspectives to the Board.

Dividends

Subject to market conditions and the Company’s performance, financial position and outlook, the Board will seek to pay a dividend that increases year on year. During the year, the Board considered income receipts, forecast dividends, inflation, and the dividend yield of other investment trusts in the AIC Global Sector. The Board was pleased to be able to pay total dividends of 24.00p per ordinary share for the financial year ended 31 December 2022, a 26% increase on the previous year. The Board aims to continue delivering a rising dividend year after year as well as capital growth.

VIABILITY AND GOING CONCERN STATEMENTS

VIABILITY STATEMENT

The Board has assessed the prospects and viability of the Company beyond the 12 months required by the Going Concern accounting provisions.

The Board considered the current position of the Company and its prospects, strategy and planning process as well as its principal and emerging risks in the current, medium and long term. The Company’s Investment Objective was approved by shareholders in April 2019. After the year-end but prior to approval of these Accounts, the Board reviewed how it is performing against its strategic objectives and its principal and emerging risks.

The Board received regular updates on performance and other factors that could impact on the viability of the Company.

The Board also engaged with the Investment Manager on the longer term impact of climate change and other societal change factors on the portfolio, and how the portfolio will be transitioned to a Net Zero greenhouse gas emissions position by 2050.

The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for at least the next five years; the Board expects this position to continue over many more years to come. The Company’s Investment Objective is to achieve capital growth and a rising dividend and the Board regards the Company’s shares as a long-term investment. The Board believes that a period of five years is considered a reasonable period for investment in equities and is appropriate for the composition of the Company’s portfolio.

In arriving at this conclusion, the Board considered:

• Financial Strength: As at 31 December 2022 the Company had Total Assets of £3.1bn, with net gearing of 4.7% and gross gearing of 7.8%. At the year end the Company had £88.9m of cash or cash equivalents.
  
  

• Investment: The portfolio is invested in listed equities across the globe. The portfolio is structured for long-term performance; the Board also considers five years as being an appropriate period over which to measure performance.
  
  

• Liquidity: The Company is closed-ended, which means that there is no requirement to realise investments to allow shareholders to sell their shares. The Directors consider this structure supports the long-term viability and sustainability of the Company and have assumed that shareholders will continue to be attracted to the closed-ended structure due to its liquidity benefit. During the year the Investment Manager carried out a liquidity analysis and stress test which indicated that around 94% of the Company’s portfolio could be sold within a single day and a further 6% within 10 days, without materially influencing market pricing. The Investment Manager performs liquidity analysis and stress testing on the Company’s portfolio of investments on an ongoing basis under both current and stressed conditions. The Investment Manager remains comfortable with the liquidity of the portfolio under both of these market conditions. The Board would not expect this position to materially alter in the future.
  
  

• Dividends: The Company has significant accumulated distributable reserves which together with investment income can be used to support payment of the Company’s dividend. Investment income from the Company’s portfolio increased significantly in 2022 to £94.9m from £61.9m in 2021 which enhanced this position. The Company has sufficient funds to meet its Dividend Policy commitments.
  
  

• Reserves: The Company has large reserves (at 31 December 2022 it had £2.9bn of distributable reserves and £19.0m of other reserves).
  
  

• Discount: The Company has no fixed discount control policy. The Company will continue to buy back shares when the Board considers it appropriate and to take advantage of any significant widening of the discount and to produce NAV accretion for shareholders.
  
  

• Significant Risks: The Company has a risk and control framework which includes a number of triggers which, if breached, would alert the Board to any potential adverse scenarios. The Board has approved various sensitivities to market, credit, liquidity and gearing.
  
  

• Borrowing: The Company has put in place unsecured long-term borrowing arrangements of various durations going out to 2053 amounting to £160.0m. In addition the Company at the year end had drawn £63.5m of its approved borrowing facilities of £250.0m plus an accordion option of a further £50.0m. The Company comfortably meets its banking covenant tests.
  
  

• Security: The Company retains title to all assets held by the Custodian which are subject to further safeguards imposed on the Depositary.
  
  

• Operations: Throughout the year under review, the Company’s key service providers continued to operate in line with service level agreements with no significant errors or breaches having been recorded. The Company concluded the work it was undertaking to strengthen its operating model with changes being made effective from 31 December 2022. The Board concluded that these changes would reduce risk in the Company’s operating model.
  
  

GOING CONCERN STATEMENT

In view of the conclusions drawn in the foregoing Viability Statements, which considered the resources of the Company over the next 12 months and beyond, the Directors believe that the Company has adequate financial resources to continue in existence for at least 12 months from the date of approval of these accounts. Therefore, the Directors believe that it is appropriate to continue to adopt the Going Concern basis in preparing the financial statements.

DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with UK adopted international accounting standards and applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the financial statements in accordance with UK adopted international accounting standards. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss for that period.

In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
  
  

• make judgements and accounting estimates that are reasonable and prudent;
  
  

• state whether they have been prepared in accordance with UK adopted international accounting standards, subject to any material departures disclosed and explained in the financial statements;
  
  

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and
  
  

• prepare a Director’s report, a strategic report and Directors’ remuneration report which comply with the requirements of the Companies Act 2006.
  
  

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.

They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the Annual Report and Accounts, taken as a whole, are fair, balanced, and understandable and provides the information necessary for shareholders to assess the performance, business model and strategy.

Website publication

The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein.

REPORT OF DIRECTORS AND RESPONSIBILITY STATEMENT

Each of the Directors confirm to the best of their knowledge that:

• the Financial Statements, prepared in accordance with the applicable set of UK adopted International Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
  
  

• the Annual Report includes a fair view of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces; and
  
  

• in the opinion of the Board, the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary to assess the Company's performance, business model and strategy.
  
  

On behalf of the Board

The Company does not have any other comprehensive income and hence the total profit/(loss), as disclosed above, is the same as the Company’s total comprehensive income.

The £103.8m (2021: £481.2m) of Capital reserve arising on the revaluation of investments is subject to fair value movements and may not be readily realisable at short notice, as such it may not be entirely distributable. The capital reserve includes movements on the unsecured fixed rate loans of £54.7m (2021: £12.0m) which are not distributable.

The financial information set out above does not constitute the Company's statutory financial statements for the years ended 31 December 2022 or 2021, but is derived from those financial statements. Statutory accounts for 2021 have been delivered to the Registrar of Companies and those for 2022 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

The same accounting policies, presentations and methods of computation are followed in these financial statements as were applied in the Company’s last annual audited financial statements, other than those stated in the Annual Report.

Basis of accounting

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of UK-adopted international accounting standards (IASs), this announcement does not itself contain sufficient information to comply with IASs. The Company will publish full financial statements that comply with IASs on its website.

1.   Income


An analysis of the Company's revenue is as follows:

2.   Total Company expenses of £19,257k (2021: £20,049k) consist of investment management fees of £12,783k (2021: £14,127k) and administrative expenses of £6,474k (2021: £5,922k). Administrative expenses include property and other costs not connected to the ongoing investment business of the Company of £672k (2021: £471k).


        3.   The diluted earnings per share is calculated using the weighted average number of ordinary shares, which includes nil (2021: 1,611) shares held in a trust that was set up to satisfy awards made under historic share award schemes. The basic earnings per share is calculated by excluding these shares. The basic Net Asset Value per share calculation also excludes these shares.


        4.   All expenses are accounted for on an accruals basis. Where there is a connection with the maintenance or enhancement of the value of the Company’s investments and it is consistent with the AIC SORP, the Company attributes indirect expenditure including management fees and finance costs, 25% to revenue and 75% to capital profits. Specific exceptions to this general principle are:

• Expenses which under the AIC SORP are chargeable to revenue profits are recorded directly to revenue.
  
  

• Expenses connected with rental income and mineral rights income are included as administrative expenses.

ANNUAL REPORT

The Annual Report will be available in due course on the Company's website www.alliancetrust.co.uk. It will also be made available to the public at the Company's registered office, River Court, 5 West Victoria Dock Road, Dundee DD1 3JT and at the offices of the Company's Registrar, Computershare Investor Services PLC, Edinburgh House, 4 North St Andrew Street, Edinburgh EH2 1HJ after publication.

In addition to the full Annual Report, up-to-date performance data, details of new initiatives and other information about the Company can be found on the Company's website.

ANNUAL GENERAL MEETING

The 135th Annual General Meeting of the Company will be held on 27 April 2023 commencing at 11:00 a.m. at the V&A Dundee, 1 Riverside Esplanade, Dundee DD1 4EZ. Subject to there being no restrictions in place at the time, shareholders will be welcome to attend in person. In any event we will stream the AGM live to shareholders and they will be able to submit questions in advance or during the meeting. Full details of how to view the meeting and submit questions will be sent to all shareholders and will be on the Company’s website. Shareholders are recommended to lodge proxies for their votes before the meeting so that they can be certain their votes will be counted.