Securities Trust of Scotland 09 December 2020

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, we have viewed its performance as being 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 we believe 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. We view these as being potentially more conducive of sustainable dividend growth than STS’s comparative growth basis under Mark Whitehead.

It is our belief that the 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 view as 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. Another potential catalyst for further narrowing of the discount, or even a move to a premium, could be a near-term market downturn, where the defensive characteristics of STS will be sought after.