ScotGems 09 September 2019
Disclaimer
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
ScotGems (SGEM) was launched June of 2017, and aims to deliver long-term capital growth from a portfolio of small cap companies operating in emerging markets. Managed by Stewart Investors, with Ashish Swarup as lead manager, the trust has a highly concentrated portfolio with just 25 holdings.
The manager’s investment style is inherently conservative, focusing on the downside risks as well as on the upside potential of any investment. Capital preservation is deemed as important to the manager as capital growth and this means that the trust has an extremely low beta and standard deviation relative to peers. Ideas are generated through the manager’s vast network of connections, and the team anticipate meeting over 1,000 companies over a year. This is a key part of the process, with the manager looking to recognise company ambitions, expectations and the way in which the company is run.
Since the inception of the trust two years ago, the trust has struggled in performance terms. Since launch, the trust has delivered -2.9% NAV total returns. In comparison, the trust’s ‘comparative indices’, the MSCI ACWI, MSCI ACWI Small Cap and MSCI Emerging Markets, have delivered NAV total returns of 19.1%, 7.3% and 7.3% respectively. Much of this is due to the strict valuation and quality criteria the manager has, and the fact that the most expensive companies have been those that have performed the strongest. Alongside this, the company has been deploying cash during this time and even at this stage has 13.1% of the portfolio in cash. Performance has improved year to date, with the trust delivering NAV total returns of 1.3%. Nevertheless, the trust has still struggled relative to peers and the company’s comparative indices.
After reaching heights of a 6% premium after launch, the trust has seen considerable discount volatility since then, and shareholders have found the discount widening to a c. 15% discount level. Since then, the discount has narrowed and the trust currently trades at close to 8% below par.
Despite the concentrated nature of the portfolio, the managers are highly focused on preserving capital and this is reflected in the trust’s exceptionally low standard deviation (7.93%) and beta (0.23) relative to peers. However, this cautiousness, along with the strict quality and valuation criteria, has meant that the performance has been poor relative to peers and the benchmark since inception. Unfortunately for the manager, the most expensive stocks have been the ones that have performed the strongest over the past year or so. Alongside this the portfolio has not been fully invested, and even at this stage the company has 13.1% in cash. However, ScotGems’ capital protection approach could be more appealing now that we finally appear to be reaching the end of the global economic expansion after the financial crisis. This may be why the discount has come in from its lows to 8%.
| bull | bear |
| Strong capital protection characteristics | Poor performance since inception |
| Trading on an attractive discount | High charges |
| Widespread connections offers the manager unique opportunities |
Fund History
