Securities Trust of Scotland (STS) has recently undergone a change in investment manager. No longer run by Mark Whitehead and the Martin Currie team, it is now in the hands of Troy Asset Management and will be managed by James Harries. James is lead manager of Troy’s Trojan Global Income Fund and investors should expect STS to follow a similar strategy, though it will ultimately retain its original objective: to achieve rising income and long-term capital growth.
James aims to invest in a manner conducive of capital preservation and income growth, through a bottom-up allocated portfolio of global dividend payers which balances quality, growth, and income factors. As we outlined in the Performance section, company analysis is done in collaboration with the broader Troy investment team but for a stock to be included into the strategy it has to fulfil James’s three criteria: durable competitive advantages, attractive business models, and strong management teams.
Since the launch of the Trojan Global Income Fund in November 2016, its performance has been competitive with that of STS’ previous manager; despite the lack of gearing, the fund has returned 33% while STS generated a NAV return of 36.3%. More importantly James has much better record of downside protection with superior downside risk stats than STS, as we discuss in our Performance section.
The dividend of STS has been reset to an expected divided of 5.5p per share, a level that James is confident can be grown progressively through the portfolio’s underlying revenue alone. Since the announcement of a new investment manager, the discount for STS has narrowed and is currently trading on a 0.7% discount.
We think James and the Troy team are a strong management team and a good replacement for Mark. James, in his open-ended strategy Trojan Global Income Fund, has demonstrated an investment process which biases towards quality and value factors. These are arguably more conducive of sustainable dividend growth than STS’s comparative growth basis under Mark Whitehead.
The clear downside protection that the Troy’s Trojan Global Income Fund has been able to achieve over the last three years is welcome and will allow STS to have a more stable dividend yield than previously. What is more impressive is that this has been achieved with performance that was competitive with that of STS over the same period, even though James’ more valuation-sensitive and defensive approach has been out of favour, and without the benefit of gearing. Given that the risk profile of income investors is typically tilted towards capital protection rather than return seeking, we believe that this will be an attractive characteristic of STS going forward.
The discount has already narrowed significantly with the announcement of the change in manager. We believe that if James can successfully execute his open-ended strategy in a closed-ended vehicle there and investors’ expectations are satisfied the trust could trade on a premium. Another major catalyst for this could be a near-term market downturn, where the defensive characteristics of STS will be sought after.
|Strategy has a proven record of downside protection||Dividend rebasing will cause income fall in year one|
|Balanced approach to factors should create more of an 'all-weather' strategy||Use of gearing can exacerbate losses on the downside, and jeopardise capital protection advantages|
|Focus on income growth could appeal to long-term investors||Could underperform global equities during a growth stock driven market|