STS Global Income & Growth 14 December 2023

STS Global Income & Growth (STS) has announced it has agreed terms for the proposed combination of assets with Troy Income and Growth (TIGT) which is planned to take place by the end of March 2024. The combination is designed to deliver a more efficient investment solution for shareholders, with the core benefits coming from increased scale. Firstly, it will allow the enlarged STS to spread its fixed costs over a larger cost base, while improving liquidity and resources for marketing. Secondly, there has been a proposed reduction in management fees of 0.15% on assets above £250m. Finally, there will be a significant cost contribution by Troy, the investment manager of STS which is the equivalent to an 18-month fee waiver, subject to a cap of £1.1m, on the assets transferred from TIGT to STS (see Charges).

As discussed in Management, the enlarged STS will continue to be managed on the same basis as currently, under the supervision of STS’s existing lead portfolio manager, James Harries, who has been supported by Tomasz Boniek and the wider investment team since November 2020, when Troy was awarded the mandate. Since then, STS’s high-quality, high-conviction, buy-and-hold approach has resulted in it providing superior risk and downside protection characteristics with their focus on quality and capital preservation having been beneficial over what has been a prolonged period of volatility across financial markets (see Performance).

STS’s Chairman, John Evans, said “The combined entity will create a larger investment trust with significantly reduced overall costs and expected improved liquidity which will continue to follow Troy’s long term, quality-focused, conservative investment management style with a global opportunity set. We believe it is an attractive strategy for those with irreplaceable capital and in need of income”. He continued to add, “We hope this represents an important step in us being able to offer this investment approach at scale in a closed ended vehicle.”

In our view, the proposed combination of assets between the two Troy trusts, will bring many positive benefits for STS shareholders that come with its increased scale. The most attractive is the reduction in costs thanks to a larger asset base and a proposed reduction of 0.15% in management fees on assets greater than £250m. In addition, shareholders exchanging TIGT shares for STS shares will also benefit from the equivalent to an 18-month fee waiver creating less of a drag on returns over the period. The enlarged trust should be investable for larger investors and should be more liquid.

We believe STS is well positioned to offer an attractive, low-risk source of income and capital growth over the longer term. The focus on capital preservation, which is supported by an active effective discount control mechanism, is an attractive feature for investors looking to protect irreplaceable capital whilst generating a growing income. Furthermore, the larger asset base that will come with the merger bolsters the trust’s resources if buybacks are required over a prolonged period.

In our view, James and Tomasz’s benchmark-agnostic and balanced approach to income and growth should not be affected following the absorption of TIGT’s assets. STS’s current dividend yield is slightly lower than TIGT’s, which may make it less suitable for investors seeking a sole source of income. However, we think James and Tomasz’s high-quality, valuation sensitive approach provides them with a better opportunity to capture capital gains should the underlying holdings re-rate, whilst providing the basis for a sustainably-growing dividend over time. Furthermore, investors can access greater diversification benefits through a quality-focused, global opportunity set that may complement more traditional income strategies which tend to be more exposed to the value factor.