Securities Trust of Scotland 27 October 2022
Disclaimer
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.
Securities Trust of Scotland (STS) has performed well over the past 12 months, thanks to the quality-growth strategy employed by Troy since it took over management in November 2020 (see Performance). STS’s managers James Harries and Tomasz Boniek prize capital preservation highly, and have a long track record of preserving investors’ capital in rough periods on the open-ended Trojan Global Income Fund. With STS they implement the same strategy in the closed-ended space, and their portfolio is highly concentrated, with a focus on high-quality stocks whose returns have low correlation to the market’s, thus delivering on STS’s rising income and capital growth investment objectives.
STS also has strong ESG credentials. James and Tomasz are co-managers of the Trojan Ethical Global Income Fund and incorporate ESG into STS’s investment process. This has been recognised by external parties: for example, amongst all global equity portfolios Morningstar rates the trust ‘above average’ for sustainability.
STS’s Dividend was rebased in 2021, resulting in a current yield of 2.7%. This is at the lower end of the peer group’s yields; however, James and Tomasz believe they have positioned the portfolio for strong, sustainable long-term earnings and dividend growth.
Finally, STS operates a Discount control mechanism (as is common across the trusts that Troy manages), which is enforced to improve liquidity and minimise discount volatility for the trust’s shareholders.
We think recent strong returns illustrate the potential for James and Tomasz’s strategy to perform well in difficult markets. The focus on strong balance sheets, good management and sustainable earnings also looks like an attractive strategy in a troubled economic climate. We note that historically the managers’ portfolios have tended to perform well in market drawdowns, which is likely to be reassuring given the risks that currently abound.
The trust’s Dividend is not high when compared to those of its peer group, and therefore will not satisfy those only looking for a current high yield. However, we think the trust should appeal to those looking for a long-term income investment. The portfolio is tilted to where the managers think earnings growth will be strong and sustainable, and if they are right this should give a stable or rising income for many years. Additionally, the trust could appeal to those who want to benefit from the total return potential in reinvesting a growing dividend.
In the short term, some companies and industries that are less focussed on ESG factors have performed well. However, the Ukraine war has only reaffirmed the world’s commitment to transition away from fossil fuels. The strong ESG credentials of the trust are an additional factor that should attract many investors, and may be accretive to financial returns over the long run.
Bull
- Capital preservation and absolute return focus is reflected through strong 12-month performance and greater downside protection
- Dividend rebasing may increase the sustainability of dividend growth over the long term, increasing long-term suitability for income investors
- Discount control mechanism should ensure liquidity for shareholders and reduced discount volatility
Bear
- Quality-growth style may lead to underperformance during rallies led by cyclical ‘value’ stocks
- Dividend rebasing has led to a lower current yield versus the peer group
- Current OCF is higher than the peer group average
Fund History
