2008 Annual Report - Alliance Trust

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10 | Alliance Trust PLC Report & Accounts Business review Chief Investment Officer’s review Katherine Garrett-Cox Kenneth Maclean, Investment. Economic and Market Background Rising defaults in the US subprime mortgage market became a major problem for global financial markets through the second half of the year. The resulting credit crunch is now having a detrimental impact on economies around the world. Equity markets suffered large falls in January resulting in negative returns in most of our investment areas for the year to 31 January 2008. Sam Ford, Management Trainee. Equity markets suffered large falls in January resulting in negative returns in most of our investment areas for the year to 31 January 2008. The likelihood of an economic recession in the United States is now high and has prompted the monetary authorities to take decisive actions in reducing interest rates. The Federal Reserve Funds Rate has now been reduced to 2.25%, with further cuts possible in the near term. The base rate in the UK has also been reduced, so far by a total of 0.75% to 5.00%, having reached its highest level since early 2001 last July, at a time when rising inflation was viewed as the UK’s primary economic threat. Central Banks around the world are facing differing regional concerns arising from this economic turbulence whilst all are striving to maintain liquidity in their banking systems. In the US, the focus is on domestic economic growth, in Europe it is on inflation and in Asia on the potential impact to exports. In the UK, a more ambiguous approach is being adopted as the Bank of England attempts to balance its growth aspirations with its inflation targets. During the 12 months under review, our equity portfolio fell by 3.4%. The month of January alone saw a fall of 9%, negating the positive returns of the previous 11 months. Equities accounted for 93.5% (84.2%) of our assets at the year-end. This overall return masks periods of extreme volatility during the year and diverging returns from global equity markets. Our best absolute returns were in our Asia Pacific and North American portfolios. Our North American investments, driven by strong sector and stock selection, delivered an outstanding relative return of 8.5% in the year, rising by 5.9% against a fall of 2.4% in the benchmark index. In the Asia Pacific region, although we made a positive absolute return of 6.4%, we underperformed the regional market index due to our over-cautious stance in strongly rising markets through most of the year. In addition our strong relative performance in our core UK Large Cap portfolio was very encouraging.
Alliance Trust PLC Report & Accounts | 11 Brian Nicholson and Andy Killean, Asset Management. Asset Allocation Asset allocation remains heavily dominated by our exposure to quoted equities. Such a strategy has proved positive over the long-term but was more challenging in the latter part of 2007. Recognising that we need to protect the portfolio during more difficult markets, we have continued to diversify selectively into other asset classes. While we recognised early signs of problems in the credit markets, along with many others we did not foresee the full magnitude of the fall out into global financial markets and economies. We held defensive positions across regional equity portfolios, believing risk to be more fairly priced in these types of company. During last year there were a number of periods of severe equity market weakness such as in August 2007 and January 2008. We took advantage of these opportunities by selective buying on weak days and borrowed to do so. As at 31 January 2008 our net gearing level stood at 4.8% (no gearing and cash of 7.4% at 31 January 2007). We will continuously manage the Trust to maximise returns using both asset allocation techniques as well as stock selection. In addition, we have focused our quoted equity exposure to less than 250 holdings by the end of the period. Whilst we wish to have broad company exposure in the major markets in which we Asset allocation Tim Gibbens, Investment. “We will continuously manage the Trust to maximise returns using both asset allocation techniques as well as stock selection.” Overview Business Review Governance Directors’ Remuneration Financial Statements % 40 Jan ‘07 Jan ‘08 35 30 25 20 15 10 5 Information for Shareholders 0 -5 UK Large UK Small Source: Internal North America Europe Japan Asia Pacific Rest of the World Subsidiaries Private Equity Property Fixed Income Cash and Other Net Assets Borrowing
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2008 Annual Report - Alliance Trust

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