Securities Trust of Scotland 11 February 2022
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 aims to achieve rising income and long-term capital growth through investment in global equities.
Securities Trust of Scotland
Troy Asset Management
James Harries; Tomasz Boniek;
Association of Investment Companies (AIC) Sector
Global Equity Income
12 Month Yield
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
(Discount)/ Premium (Cum Fair)
Daily Closing Price
The board of Securities Trust of Scotland (STS) selected Troy to manage the trust’s assets in November 2020, Troy’s distinctive investment approach viewed as well suited to delivering the trust’s objectives, which are to provide shareholders with a rising income and long-term capital growth via investment in global equities. The Portfolio managed by James Harries and Tomasz Boniek follows the house style of Troy: a concentrated, low turnover portfolio of cash generative, high-quality stocks intended to generate absolute returns over an economic cycle.
The benchmark agnostic approach taken by the managers means STS will deviate from peers and benchmarks in terms of Performance, as was seen when low-quality value stocks rallied in late 2020 following ‘vaccine Monday’. However, James and Tomasz believe the quality focussed, buy and hold approach will better serve investors than chasing short term market rotations, and returns have been favourable since the value rally petered out around April/May 2021.
STS currently yields 2.6%, somewhat lower than its peers in the Global Equity Income sector, however, the portfolio is orientated towards generating sustainable capital and dividend growth rather than maximising current yield.
Alongside growth, James and Tomasz aim to preserve capital, which fits in naturally with the focus on quality and the avoidance of speculative investments. The managers and board are cautious regarding Gearing, having maintained the modest level of borrowing in place prior to the manager transition. Alongside NAV volatility, Discount volatility is carefully controlled via a highly active discount control mechanism (as per the other trusts that Troy manages). Overall, STS has been positioned to exhibit lower volatility than peers and the wider market without compromising on the growth potential of the trust.
Global equity income investing has become arguably more difficult with income scarce and some high dividend-paying old economy companies being disrupted by newer, technologically driven entrants. When faced with the need to replace their incumbent manager in mid-2020 following the departure of key personnel from Martin Currie, the board of STS selected Troy to manage the trust assets, and it is difficult to believe that the distinctive approach taken by the managers James and Tomasz in addressing the current challenges for global equity income investors wasn’t a significant factor in the board’s decision.
By exclusively buying high-quality businesses with sustainable competitive advantages that are robust in the face of new, innovative entrants and that are also growing free cash flows to fund reinvestment and dividends, James and Tomasz are planning to navigate between the Scylla of speculative, cash burning, low yielding growth stocks and the Charybdis of low growth, low quality (albeit currently high yielding) legacy companies. The adoption of this strategy, plus the decision to end selling options to enhance yield, has resulted in the dividends of STS being rebased, current yield being traded off for the prospect of better future capital and dividend growth. Therefore, STS may better suit a potential investor looking for long term growth and to fund a future income stream, rather than maximising current yield.
The conviction and discipline of James and Tomasz were tested early, the manager transition occurring at an inopportune time as low-quality value stocks rallied sharply in late 2020 (see Performance). The managers were unfazed and quickly transitioned the portfolio to be in line with their core strategy, and in our view, it is reasonable for investors to expect the future performance of STS to reflect this undiluted, high conviction quality approach.
|Capital preservation, absolute return approach leads to lower volatility and superior downside protection
||Currently higher OCF than peer group average
|Highly liquid with tightly constrained discount volatility due to active discount control mechanism
||Quality growth style may underperform in rallies led by lower-quality, cyclical ‘value’ stocks and sectors
|Quality focus with a track record of delivering sustainable capital and dividend growth
||Low current yield compared to peers