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Fund Profile

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.

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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.

Analyst's View

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.

bull bear
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
Continue to Portfolio

Fund History

14 Dec 2023 Fund Analysis
STS’s balance between quality income and growth may prove resilient in a challenging economic environment…
06 Dec 2023 Fool's gold
Cash would have been a poor investment through this period of high inflation…
08 Jun 2023 Fund Analysis
STS’s focus on optimising the balance between quality income and growth may prove valuable in an uncertain market environment…
11 May 2023 Tipping point
Battered growth strategies have staged a comeback recently, but what happens now?
27 Oct 2022 Fund Analysis
STS’s high-quality global equity income approach has proven resilient over both the long and the short term…
11 Feb 2022 Fund Analysis
A high conviction, high-quality approach to global equity income investing…
09 Feb 2022 The dividend dilemma
We examine the trade-off between earning a current high dividend yield and growing future dividends...
09 Dec 2020 Fund Analysis
STS has a new manager with a strong track record…
09 Dec 2020 Flash update: Securities Trust of Scotland
We look at the recent change in management of STS and what it means for investors…
09 Jan 2020 Full house
The KTI team’s ‘top picks’ for 2019 have delivered strong results…
25 Sep 2019 Fund Analysis
Led by Mark Whitehead, STS offers an attractively valued portfolio of global equities...
03 Apr 2019 Nice guys finish first
We review the rise of ESG, its impact on investment trusts, and the various ways ESG has evolved in the trust world...
06 Feb 2019 Income for the long haul
With 'ISA season' looming we identify investment trusts which offer long-term, dependable income streams for yield-hungry investors...
23 Jan 2019 Fund Analysis
Securities Trust of Scotland (STS) is a broadly diversified global equity income portfolio, which has achieved a solid yield of 3.8%...
31 Dec 2018 Ladies, gentlemen and non-binary persons, start your engines…
With Britain only months away from the bright, sunlit uplands of Brexit and America officially ‘great’ again, we present a selection of ideas for what looks set to be a fascinating year…
29 Nov 2018 Fund Analysis
A broadly diversified global equity income offering with an above average yield of 3.8%, on a very wide discount relative to its peers...
12 Oct 2017 Roaring back…
We analyse the drivers behind the significant outperformance of global active managers in 2017, following what was a very poor year for them in 2016...
03 May 2017 I'm not interested in 'me-too' portfolios...
We meet Securities Trust of Scotland manager Mark Whitehead and ask how he is helping to shape Martin Currie's equity income strategy...
16 Mar 2017 Having your cake and eating it too?
We look into the new fad of trusts paying their dividends out of capital and analyse whether or not it really is a sustainable strategy...
22 Feb 2017 Into the wilderness...
In this detailed study of the global equity sectors, we analyse how managers are positioned in a world of high valuations and seismic political changes...
21 Feb 2017 Fund Analysis
A global equity income fund with an experienced management team and a focus on dividend growth...
11 Nov 2016 Analysis: The mounting threat to equity income trusts' dividends...
With fears over potential dividend cuts across the UK mounting, we analyse how safe UK equity income's dividends really are...
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