By James Thorneley Portfolio restructuring of Securities Trust of Scotland has resulted in recent ou...
By James Thorneley
Portfolio restructuring of Securities Trust of Scotland has resulted in recent outperformance by the closed-end fund.
Over the four months to 30 April the trust's NAV has outperformed the FTSE All-Share every month, falling by just 3.6% over the period compared to a fall of 6.6% in the index. During the year to 31 March the NAV rose by 8.7% compared a 9.9% benchmark rise. Trust manager Tom Maxwell arrived at Martin Currie from Friends Ivory & Sime in July. In November he turned over the portfolio with the intention of refocusing the trust on purely UK equities. Until then the trust had an international portfolio, which Maxwell believes adversely affected the trust's performance.
He said: "The opportunity to buy stocks which provided reasonable yields overseas was limited. This meant we had to buy high yielding UK stocks to compensate and were unable to buy UK stocks which offered a degree of capital growth instead of a higher yield."
Along with refocusing the portfolio towards the UK, Maxwell has structured the portfolio into four sections. Active, but measured positions were taken against the top 25 stocks in the FTSE All-Share, and the top four sectors are also closely monitored.
This accounts for between 55-60% of the portfolio. A further 10-15% is invested in a selection of conviction stocks. These are purchased for their growth prospects regardless of size, yield or sector.
Included in this part of the portfolio are stocks such as Provident Financial - the personal finance company specialises in providing home credit and insurance. Last June the share price peaked at 1005p and then fell away when the company announced it was expanding into eastern Europe. Market sentiment turned away from the company as it viewed the company's expansion as a sign that the UK market was maturing and it also regarded Poland as a high risk area, according to Maxwell.
He added: "The UK market may be maturing but I regarded the move into Poland as positive. The instance of bad debt is greater in Leeds than it is in Poland."
Shares in the company are currently trading at 705p after bottoming out at 495p in February. Other conviction stocks in the portfolio include 3i, Electrocomponents and Logica. The historic fixed interest and split capital portfolio accounts for a further 8% of assets and is being reduced. The remainder of the portfolio is invested in a selection of mature companies that offer superior dividend growth. In general Maxwell favours companies which can achieve topline growth rather trying to improve margins. He said: "In this low interest and inflation environment companies will find it hard to hang on to any improvements they make in the level of their margins."
In light of the restructured portfolio Deutsche Bank regards the trust as an attractive investment. Carolyn Coke, an investment trust analyst at the bank, said: "In our opinion, the restructured portfolio and turnaround in performance has not been recognised by the market. The 20% discount is unjustifiably wide and our recommendation is buy."
Unlike other trusts in the sector the trust has an attractive shareholder base with 80% of shares held by private investors. Maxwell said he did not envisage a large number of institutions exiting the trust causing the discount to widen further.
Less environment, more governance threatens to undermine firms' green credentials
Evidence your compliance
Quarter of single pensioners dependent on state