Transformed: the lone wolf trust on the hunt for ‘ugly ducklings’
MOST investment trusts are managed by huge global brands, such as Henderson anda JP Morgan. But there are exceptions. Step forward The Scottish Investment Trust, a £947million fund that has been self-managed in Edinburgh for nigh on 130 years. All its staff are dedicated to making the trust an investment success.
Its roots are reflected in its name, but there is nothing parochial about its investment ambitions. It is a global fund, searching worldwide for firms that will generate a mix of capital return and a growing dividend.
Run by Alasdair McKinnon, the trust has in recent days reported its annual results for the year to the end of October. They make for impressive reading, especially confirmation that the trust has increased its dividend for the 33rd consecutive year.
Under the new chairmanship of James Will, it has been given a new lease of life. The board has been freshened up, most support functions have been outsourced to save costs and the investment approach has been made racier.
The result is a trust that has comfortably outperformed its global peers over the past year, generating returns of 35 per cent against a 23 per cent sector average. ‘We needed to reinvent ourselves,’ admits Will. ‘We had to make the investment approach more focused and more dynamic.’
Part of the revolution was the installation of McKinnon in the hot seat in early 2015, taking over from John Kennedy, who was quietly put out to pasture. McKinnon, part of the investment team for 13 years, describes the new investment approach as ‘contrarian’ and ‘high conviction’.
It is primarily about identifying firms that most rivals have given up on but Scottish believes offer an investment opportunity. It will then back its judgment by taking big stakes in the companies. ‘We call them ugly ducklings,’ says McKinnon. ‘If you asked 100 investors if they would buy the stock, 99 would say no. We are the lone wolf. If we can see evidence of a possible turnaround in fortune, maybe because of new management, we will invest.
‘Australian wine maker Treasury Wine Estates is a case in point. It had a chequered history, but we decided to buy into the stock in August 2015 because of new management. In our last financial year, it was the biggest contributor to performance.’
McKinnon also likes companies either on the cusp of major change or which he believes have more to offer than maybe everybody else thinks.
Despite the fact that he runs a tight-knit investment team – four, including himself – and Scottish does not have the same financial muscle as most rivals, he says they are not disadvantaged.
‘Edinburgh is a great place to be as an investment manager,’ he argues. ‘Lots of companies and investment brokers come by and we get to see them. We are never short of investment ideas.’
With enough income in reserve to pay four years of dividends, future dividend rises are almost guaranteed. Shareholders should also welcome the trust’s drive to cut costs. Ongoing charges are running at 0.49 per cent against 0.68 per cent two years ago.
McKinnon is unwilling to comment extensively on how markets are likely to fare this year. But he believes there is now a degree of political direction over how the UK advances to Brexit, while US President-elect Donald Trump, for all his failings, ‘has got markets going’. ‘Markets are always challenging,’ he says. ‘This year will be no exception.’