STS Global Income & Growth 08 June 2023
This is a non-independent marketing communication commissioned by Troy Asset Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
STS Global Income and Growth Trust (STS), formerly Securities Trust of Scotland, has been renamed following an internal review to better reflect the overall investment objective of the trust, which is to deliver a growing level of income and provide steady capital growth over the long term. This follows the board’s decision to award Troy the investment mandate in November 2020, due to the ability of the current managers to deliver a rising income, capital growth and standout capital preservation characteristics. This has been demonstrated through their equivalent open-ended strategy, the Trojan Global Income Fund, as discussed in Performance.
STS’s managers, James Harries and Tomasz Boniek, currently maintain a cautious approach due to the uncertain outlook for inflation and interest rates. The pair believe their focus on high-quality companies should offer some protection through those companies’ competitive advantages, surplus cash flows and greater predictability of revenues, as demonstrated by their 40% allocation to consumer staples. The expectation is that such companies should be able to cope better with rising cost pressure and be less impacted by the increased cost of capital (see Portfolio).
James and Tomasz are seeking to optimise the income, quality and growth potential of the portfolio to deliver a sustainable and growing long-term income. The 2023 financial year showed signs of renewed strength through increased revenue per share, resulting in a higher historical dividend yield of 2.9%.
The introduction of the Discount control mechanism (DCM) in 2020 has significantly tightened the discount range and increased the liquidity of the trust, whilst maintaining shareholder value. This is consistent with Troy’s overarching capital preservation strategy.
We believe James and Tomasz’s ability to balance the income and growth potential of the portfolio has been demonstrated by the resilience of the revenues generated by STS’s underlying holdings and is reflected in the latest, higher dividend. Given their focus on quality and less cyclical businesses, we believe that STS offers a good, long-term option for investors seeking a sustainable and growing dividend over the long term. We think this is particularly important given the elevated cost of debt, which is likely to impact portfolio company earnings and make income a more significant contributor to total returns. We note STS does not seek to maximise yield and higher payouts are available. To some extent, this reflects the underweight to companies that have benefitted from higher inflation, supply disruptions and Russia’s invasion of Ukraine, such as oil and gas producers. However, we believe the ever-increasing pressure to transition away from fossil fuels supports the managers’ decision and adds to the attraction of the approach.
We believe the strong risk-adjusted return track record of the strategy is particularly attractive, given the heightened levels of volatility seen across financial markets. We think this is thanks to James and Tomasz’s patient, valuation-sensitive approach. Furthermore, we view their high conviction and unwavering commitment to quality a refreshingly benchmark-agnostic approach to income investing. Despite facing some challenges during periods when stylistic biases have driven returns, this has allowed them to consistently preserve shareholder value over the long term.
- Superior record of capital preservation compared to peer group and equity market
- The managers’ increased focus on optimising income and growth offers the potential for sustainable dividend growth over the long term
- Strict discount control mechanism ensures shareholder value, provides greater liquidity and constrains discount volatility
- May underperform during narrow stylistic-driven market rallies
- Low current yield compared to peers, although dividends are growing
- Higher OCF relative to the peer group average