Alliance Trust plc, the £3.9 billion Dundee-headquartered fund, said it produced “very strong” investment returns for the six months ended June 30, 2024, with a Net Asset Value (NAV) Total Return of 9.5% and Share Price Total Return of 10.2%.

Nonetheless, Alliance Trust underperformed its benchmark index, the MSCI All Country World Index (MSCI ACWI), which returned 12.2% over the six months.

Alliance Trust’s average discount to NAV over the period was 4.8%, which compares favourably to the average AIC Global Sector discount of 9.7%.

The total of the fund’s first two interim dividends declared for 2024 is 13.24p, an increase of 5.8% on the same payments for 2023.

Alliance Trust uses external fund managers Willis Towers Watson (WTW), which in turn appoints a number of other stock picking firms with different styles.

“Our underperformance against the index was primarily attributable to market returns being highly concentrated in a narrow group of artificial intelligence (AI) related stocks,” wrote Alliance Trust chair Dean Buckley.

“This has made it difficult for active managers to outperform, but WTW is confident that the portfolio is well positioned for long-term returns versus the index.

“The Company’s Share Price Total Return was 10.2%, marginally underperforming the average Share Price Total Return of the Association of Investment Companies (AIC) Global Sector peer group of 10.7%.”

Last month, Alliance Trust and London-based Witan Investment Trust plc agreed to merge to create a company managing £5 billion in the latest example of consolidation in the investment trust sector.

The newly formed Alliance Witan is expected to be eligible to join the FTSE 100 index.

Alliance Trust’s investment managers Craig Baker, Stuart Gray and Mark Davis of Willis Towers Watson wrote that the fund benefitted from a 31% rise in Alphabet, a 36% rise in Ebara, the Japanese industrial group, a 28% rise in Amazon.com, a 41% rise in Denmark’s Novo Nordisk, and a 57% increase in Hargreaves Lansdown, the Bristol investment platform.

The managers wrote: “Global equities continued to rise in the first half of 2024, although investors’ hopes at the start of the year for a rapid reduction in interest rates to boost equity valuations and corporate profit margins were thwarted by the surprising resilience of economic growth and the persistence of inflationary pressures, including wage growth.

“While market breadth continued to increase regionally, the US still dominated, and returns by sector became extremely concentrated in information technology as the half-year progressed due to investors’ enthusiasm for AI.

“Indeed, almost a quarter (23%) of the MSCI ACWI’s 12.2% advance came from just one stock, NVIDIA, whose valuation rose by an astonishing 151% in six months. NVIDIA’s cutting-edge chips are at the epicentre of the AI boom and its surging stock price meant that it briefly overtook Microsoft and Apple to become the world’s most valuable company …

“It was a period of two distinct quarters for our portfolio, with outperformance of the index in the first quarter due to good stock selection across a variety of countries and industries. But we underperformed in the second, largely because of our underweight positions in NVIDIA, and Apple which rallied in the second quarter after announcing new AI features for its phones …

“Although the geopolitical backdrop remains turbulent, we believe that the biggest risk facing investors today is the structure of the market index.

“The index we compare ourselves to, MSCI ACWI, holds around 3,000 stocks, with an average position size of 0.03%; but Microsoft, Apple, and NVIDIA each represent around 4% of the index at the end of the six-month period, more than 110x the average stock position size.

“Volatility in companies that are so large in the index creates significant distortions. When they move, the whole index moves with them.

“Owning large overweight stakes in such companies as their share prices rise might help short-term performance but we believe it creates significant risks to long-term returns if sentiment turns against them or they fail to deliver expected profits.

“History shows that market concentration can persist for long periods but ultimately ends with many market leaders falling by the wayside.

“Remember Cisco, Intel and AOL, the fallen giants of the internet revolution in the late 1990s. So, we are acutely aware of the need to actively manage our exposures to achieve an acceptable balance between risk and reward …”