By Jenne Mannion The £600m Securities Trust of Scotland is overweight in the oil, pharmaceutical and...
By Jenne Mannion
The £600m Securities Trust of Scotland is overweight in the oil, pharmaceutical and tobacco sectors, as well as some niche financial companies.
Tom Maxwell of Martin Currie, who manages the portfolio, said these sectors have strong cash generation characteristics, as well as some of the strongest earnings revisions in the market. He said: "The oil price has surprised analysts by being as robust as it is, at around $30. We anticipate the average oil price next year will end up higher than most market forecasts of around $22."
He prefers pharmaceuticals to other defensive areas, in light of their long-term growth prospects. Maxwell added: "Until recently, tobacco stocks have been out of favour, due to litigation fatigue. This has recently taken a turn for the better and the market is starting to focus on the international growth prospects of these highly cash generative companies. Major underweightings in the trust are food retailing, food manufacturing, and beverage stocks."
Maxwell is simultaneously playing a number of themes in the portfolio, including technology, outsourcing and a selection of what he calls niche companies. He added: "We are aiming to run a balanced portfolio so there is a mixture of old economy and new technology stocks. Within technology, we favour software companies because software is at the centre of all technology. Software companies also tend not to be capital intensive, generate cash and actually pay dividends."
Pure information technology represents 4.4% of the trust, in line with the market. If taking tech, media and telecom in total, Securities Trust of Scotland is about 80% weighted to the market. This underweight position is mostly due to a belief that several of the competing local exchange carriers are currently on unjustifiably high valuations.
Outsourcing is also a key theme, because Maxwell considers that in a low inflation environment, management will continue to outsource anything that is not a core competency. Capita and Hays are favoured for that reason.
Maxwell said: "We also look for unique companies in niche or fragmented markets. To date most of these have turned out to be financial service companies such as Intermediate Capital, Provident Financial and ED&F Mann."
The portfolio has risen to six out of 20 funds in the UK Income Growth sector over one year, mid to mid to 14 June, following the change of strategy led by Maxwell.
The one-year performance is an improvement on the three-year performance, where the trust is placed 16 out of 20 funds, mid to mid to 14 June.
One of Maxwell's first moves in revamping the portfolio from an International Income Growth Fund to a UK Income Growth Fund was a lowering of the portfolio yield relative, with the objective of delivering superior long term total return with a better balance between capital and income return.
A similar reduction in yield has also occurred in the similar £30m Martin Currie Income Fund, a unit trust which, in the main, mirrors the management style of the £600m investment trust.
Maxwell said: "The yield on the unit trust portfolio has historically been approximately 30% higher than the market. This has been reduced to a 10-15% premium yield, which we believe we will lead to superior capital performance and dividend growth."
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