All change... but income is still essential

I T HAS been all change at Securities Trust of Scotland, a £ 200 million investment fund with a global income mandate.

Since mid-November last year, the trust’s portfolio has undergone a major overhaul with the appointment of new managers to oversee the fund’s assets.

Out went Martin Currie, an offshoot of American fund giant Legg Mason, and in came Troy Asset Management that already runs investment trusts Personal Assets and Troy Income & Growth.

Troy’s James Harries has been responsible for the t r u s t ’s restructuring. In line with the asset manager’s overall conservative investment stance, the emphasis is now as much on capital preservation as on generating returns for shareholders.

It has resulted in a reset with between 85 and 90 per cent of the portfolio being changed. Only three key stocks inherited from Martin Currie – Microsoft, Cisco and PepsiCo – have been kept. ‘Our focus is about investing in quality businesses,’ says Harries, ‘concentrating on sectors we l i ke whil e a v o i d i n g low-quality areas of the stock market.’

So, the 33-strong portfolio is now dominated by companies to be found in industrial sectors known for generating high rates of return on capital employed – f or example, consumer staples, consumer discretionary, healthcare, technology and light industries.

Sectors that are avoided include mining, oil and insurance – either because they are too capital intensive or cyclical in nature.

It means a portfolio where income-generating stocks such as tobacco companies BAT and Philip Morris and consumer goods giants Unilever and Reckitt Benckiser dominate. A recent addition is US industrial supplies company Fastenal which ticks all Harries’ boxes – in particular its ability to earn high returns from the capital it employs in the business.

‘It’s a substantial restructuring of the portfolio that we have undergone,’ says Harries. ‘But we have done it with our shareholders in mind, many of whom are retired and reliant upon the capital they have tied up in the trust and the income it produces.’

Just over half of the portfolio is invested in companies listed in the United States with nearly 30 per cent in UK businesses. The top 10 holdings account for 47 per cent of assets.

Although such portfolio disruption has involved significant trading costs, Troy has mitigated this by waiving its 0.65 per cent annual management charge for the first 12 months.

The trust’s dividend has had to be reset so that it can be comfortably paid from the income generated by the portfolio. ‘ We’ve reduced the dividend slightly,’ says Harries, ‘but it’s now a realistic payment and should grow from here.’ Under the previous management, the trust’s income was boosted by trading in derivatives, something Harries will not do.

The most recent quarterly dividend a n n o u n c e d was 1. 375p a s hare, compared to 1.45p in t he previous financial year, and equates to a dividend yield a tad above three per cent. Harries and the trust’s board are keen to allow shareholders to sell their holdings without being hit by their shares trading at a discount to t he value of t he underlying assets. ‘If we allow people to sell without worrying about discounts, they are also more confident to buy,’ says Harries.

The trust also has the ability to borrow money if it wants to increase its exposure to stock markets.

Although the trust’s performance over the past year is nothing to shout about – a small loss of 3.7 per cent – Troy’s impact on the fund has yet to come through. The stock market identification code is: B09G3N2.