Securities Trust of Scotland: February 2022 investment trust update

• James Harries is a highly experienced income manager with an enviable track record
• Sheltering investors’ wealth when markets are volatile is the overarching focus of Troy’s approach
• Significant changes have been made to the trust since Troy took charge in November 2020

How it fits in a portfolio

Securities Trust of Scotland aims to deliver long-term income and capital growth. The manager aims to grow the income sustainably over time rather than seeking higher but potentially unreliable yields and focuses on high-quality companies. He believes investing for income globally is optimal as it provides a broader hunting ground than one country or region.

Given its focus on quality, this trust could work well alongside other investments in out-of-favour companies with recovery potential – also known as ‘value’ investing. It could also complement those targeting greater growth that don’t tend to pay dividends. Its global reach may also add diversification to an income-focused portfolio.

Manager

Martin Currie was responsible for managing the trust since launch in 2005 but following the departure of manager Mark Whitehead the Board looked elsewhere for a replacement.

Troy Asset Management was appointed as the new investment manager in November 2020 with senior fund manager James Harries at the helm. Prior to joining Troy in 2016, Harries worked at Newton (BNY Mellon) where he managed global income funds from 2005 onwards. Harries is one of the most experienced global income managers around and we hold him in high regard.

Harries also manages Trojan Global Income, an open-ended fund that invests in a similar way to this trust. This fund currently features on the Wealth Shortlist. He’s also co-manager of the recently launched Ethical Global Income fund. Given the cross-over between these three portfolios we believe Harries is comfortably able to manage his time. We think he’s got one of the strongest track records in the sector, and we like his simple, disciplined, and patient investment style.

Tomasz Boniek supports Harries on his hunt for quality companies around the globe. He joined Troy from Susa Fund Management in 2017 and holds an MBA from the London Business School.

Process

Harries’ approach has all the hallmarks of a Troy portfolio – a focus on large, financially sound companies, that have shown their resilience through both good and bad times for the wider economy. He has scope to invest anywhere in the world but tends to favour developed markets, such as the US, Europe, and the UK. Although he can invest in higher-risk emerging markets, he tends to avoid them, preferring companies that sometimes sell their products in these regions.

His team pay close attention to free cash flow, a key measure of dividend sustainability. It shows what’s left over from running operations that can then be used for other purposes like paying a dividend, buying back shares, or reducing debt obligations. A company that generates healthy levels of free cash flow will, in theory, be able to sustain, or even increase how much they return to shareholders.

Every holding must pay a dividend, but the fund doesn’t have an income target. Harries is more focused on total return, a combination of income and growth, than income alone and won’t chase an unsustainable yield that is potentially damaging to long-term returns.

This is a concentrated portfolio of between 30-50 holdings. That means each company can have a significant impact on performance, although it’s a higher-risk approach. Sector-wise consumer staples, healthcare and technology are where the manager finds the most opportunity.

When making any investment, the long-term is at the forefront of the team’s analysis. They don’t tend to react to short-term blips in the stock market or wider economy, preferring a low turnover approach, which means new purchases and sales are kept to a minimum. Only a few new ideas are considered each year, and the manager only sells shares if he feels the outlook has changed, the company becomes too highly valued, or he finds a better idea elsewhere. Troy conducted a spring clean when they assumed management in November 2020, resulting in significant changes to the underlying holdings in order to bring it in line with their approach.

More recently, the manager sold telecommunications company Verizon and IG Group, the spread betting platform, after being unconvinced with their decision to acquire Tastytrade. These sales made way for Boston Properties, the real estate investment trust (REIT). Investing primarily in offices in US coastal cities, the team believes office space will still be fundamental to the way we conduct business in a post Covid world. Japanese company Nintendo was also added to the trust. Traditionally known for its gaming heritage, the company has ambitious plans to broaden its reach even further into the entertainment industry. Its new enhanced platform offers even greater potential to further monetise its loyal following.

Investors should be aware that the manager has flexibility to use derivatives and gearing (borrowing to invest) which, if used, adds risk.

Culture

Securities Trust of Scotland was established in 2005 and is a constituent of the FTSE SmallCap index. It’s currently managed by Troy Asset Management, an independent ‘boutique’ investment company. The majority of the business is owned by the managers and fund managers. We view this positively, as it means both the business and the funds are run with a very long-term view and managers’ interests are aligned with investors.

Sheltering investors’ wealth has always been the most important thing at Troy. The managers believe that’s the best starting point for growing wealth over the long term. All Troy funds are run along the same lines – disciplined and patiently investing in a small number of high-quality holdings. Managers of different Troy funds all contribute to the thorough research of around 200 companies deemed suitable for Troy portfolios, creating a collegiate environment.

As long-term investors, Troy are mindful of environmental, social and governance (ESG) factors. As part of their research process the team analyse the impact of climate change, pollution and waste, human capital, and corporate governance.

Cost

The ongoing annual charge for the trust’s last financial year (end of March 2021) was 0.92%. This makes it one of the more expensive trusts in the AIC Global Equity Income sector. Whilst higher charges create a bigger hurdle to deliver positive returns, we recognise the value the manager’s added above these charges throughout his career. Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Performance

Since the Securities Trust of Scotland launched in June 2005 it’s returned 316.13%* vs 298.67% for the AIC Global Equity Income sector. However, for most of this period it was managed by Martin Currie with a different approach. It’s also worth noting that a discount control mechanism was introduced when Troy took over to ensure the net asset value (NAV) and share price don’t stray too far from each other.

Harries has an enviable long-term track record managing global income portfolios. Since becoming manager of this trust in November 2020, it’s NAV has grown by 14.11% vs 15.70% for the AIC Global Equity Income peer group. The share price has risen by 14.79%. This is a short time period though and remember past performance is not a guide to the future. All investments will fall as well as rise in value so you could get back less than you invest.

In keeping with Troy’s investment approach, Harries’ focus on high-quality companies means we would typically expect the trust to hold up relatively well when markets are falling. In contrast, we would expect the fund to lag the peer group when markets rise quickly.

Over the past year their investment in Clorox, the US cleaning product manufacturer dragged on performance. It’s share price surged in 2020 after the market identified the business as a beneficiary of COVID. However, it’s since retreated as economies and society have started to normalise. Unilever, the consumer goods company, and Hargreaves Lansdown (which has since been sold) were also among the laggards.

It wasn’t all bad news though. Tobacco companies Philip Morris and British American Tobacco were among the top performers and the managers believe its transition to ‘heat-not-burn’ products only enhances its sustainability over the long-term. Paychex, the payroll services provider was another notable contributor.

The fund’s historic yield was 2.6% as at end of January 2022, which is higher than the broader global stock market. Remember yields are variable and not a reliable indicator of future income.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2022

Find out more about more Securities Trust of Scotland including charges

Securities Trust of Scotland KEY Investor iNFORMATION

Want our latest research sent direct to your inbox?

Our expert research team provide regular updates on a range of investment trusts.