How good old bricks and mortar are helping fund rebuild its fortunes . . .
GLOBAL income fund Securities Trust of Scotland is in transition mode. It has a new manager, a renewed focus on increasing income for investors and there is a burning ambition to grow the trust by issuing new shares.
This is positive news for investors, but it is still early days for a £200million trust that is overshadowed by bigger rivals with records of dividend growth going back 20 years and more.
The fund’s dividend history – much shorter in light of it being launched in 2005 – just does not stand up against investment trust giants Bankers, The City of London and Foreign & Colonial.
Securities Trust has cut its annual dividend once and has frozen it twice. In the financial year just ended, it managed to maintain quarterly dividends on a par with the previous year only by raiding income reserves, leaving just a quarter’s worth in the tank for the future.
In the previous financial year, an 18 per cent annual dividend rise was in part fuelled by dipping into capital reserves – a controversial move. The trust did this to enhance its appeal among income seekers.
The individual entrusted with the trust’s renaissance is Mark Whitehead, head of global income at Edinburgh-based Martin Currie. He has run the fund for the past year and has already started to galvanise its fortunes, resulting in the trust’s one-year performance being better than its three-year record.
Whitehead has not hung around in refocusing the trust. He has cut the holdings to 46, providing exposure to 16 countries. ‘We want to back our convictions,’ he says. These direct holdings are complemented with six positions in investment funds.
He has also shifted the portfolio towards slightly smaller stocks in the hope he can find more dividend friendly companies to boost income reserves and shareholder income. The move has resulted in the trust taking stakes in UK brick maker Ibstock and Netherlands-based global science firm Koninklijke DSM.
‘Ibstock is producing more bricks than ever,’ he says. ‘A new plant is due to come on stream this year that will help it meet the growing demand for bricks, fuelled by the Government’s drive to build more homes. It should help boost the company’s earnings and trigger a high single-digit dividend increase.
‘Meanwhile, DSM is benefiting from the strong demand for nutrients. Like Ibstock, it is enjoying good organic growth, generating strong cash flow and paying a healthy dividend.’
These stocks sit alongside key holdings in international brands, such as Apple – a 3.5 per cent portfolio position – and tobacco giant Philip Morris.
The trust has also borrowed £25 million of ‘cheap’ money, enabling Whitehead to invest in a spread of income-friendly assets, such as infrastructure, social housing, private equity and real estate investment trusts.
The income from these assets, he says, should more than cover the 2 per cent cost of the loans, allowing any surplus to replenish the trust’s income reserves and potentially boost payouts to shareholders.
In addition, he has not been afraid to use options – complex financial instruments – to enhance the trust’s income. ‘The trust is making headway,’ he says. ‘We are doing all we can to grow the dividend.’
Martin Currie is part of global financial group Legg Mason, which owns a number of investment brands including ClearBridge and Western Asset Management.