Investment trust is sprightly if rather contrary after 130 years
Venerable institution is dedicated to unloved, unfashionable stocks
FOR a fund that’s approaching its 130th birthday, the Scottish Investment Trust (SIT) is putting on a sprightly turn of speed.
Formerly lacklustre, the Edinburgh institution is now in the top quartile of its Association of Investment Companies (AIC) global peer group.
Dedicated to unloved and unfashionable stocks, the bold new investment style is feeding expectations of outperformance, making one of the UK’s oldest investment trusts a bit more fashionable itself.
On Monday prospects are expected to brighten further as a special meeting of shareholders is expected to approve a £90 million buy-back of Aviva’s 12 per cent stake in the £825m net asset trust.
The deal was negotiated by the board following the insurance giant’s acquisition of long-time SIT holders Friends Life.
Aviva is selling at a 10.75 per cent discount so the buy-back will deliver a boost of 1.3 per cent of SIT’s net asset value (NAV), most likely reducing further the trust’s discount, which has already shrunk from 10.6 per cent in mid-2014 to last week’s 7.3 per cent of NAV. The move will be seen as another positive step by investors in the high-conviction global contrarian fund, founded in Edinburgh in 1887.
With its polished brass nameplate at a stately New Town address, SIT has reaped rewards of a quiet but drastic re-invention over the past two years.
That process started with the appointment in 2014 of Alasdair McKinnon, 41, as manager. The trust slashed its investment team – “a regrettable process” in the words of Mr McKinnon – from nine people to five. Among those to leave was former manager John Kennedy. It outsourced its back office and transformed a diffident marketing profile with professional PR gloss.
After two short years of the new strategy, the narrative is still more about expectations than achievement, as SIT is currently slightly underperforming its peer MSCI World Index.
A fund that disdains to follow the crowd is expected to do better, and investors will look for outperformance soon.
In the meantime, the “streamlining” has helped the selfmanaged fund to cut charges to an impressive 0.49 per cent, reflecting, as Ally McKinnon stresses, nothing more than the fixed costs of running the company, rather than profits for the managers.
The new keep-it-simple structure and style is directed by SIT’s board, including chairman James Will, a former Shepherd & Wedderburn senior partner, plus high-profile investment figures including Hamish Buchan and Russell Napier, and former Baillie Gifford North America fund manager Mick Brewis.
Their view is that small teams make the better, bolder decisions necessary for contrarian investing.
“We don’t need people to take phone calls from brokers or look up directories any more,” says Mr McKinnon, who joined SIT in 2003. “We already have too much information.Alsoifyouhavetoo big a team it’s a dis-economy of scale in terms of efficiency.
“It’s true of investing that larger groups behave like a committee. They tend to gravitate towards a consensus view based on whatever has just happened in the last six months.”
The outcome of the changes saw 35 per cent growth in total return in 2015-16, against a 23 per cent sector average, allowing an eight per cent year-on-year dividend rise (the 33rd consecutive one) in January to an 8.25p final dividend. The fund also paid a 9p special dividend. Total annual dividend: 22.5p.
SIT believes that, at a time when passive investing and exchange traded funds (ETFs), are targeting market share, the job of the active investor is to stand out from the trackers and closet-trackers.
Accordingly, the oncetraditionalist, value-hunting fund has a schematised and slickly packaged offer, including easy web access for retail investors.
Mr McKinnon sees the rise of passive investing, said to be on course to overtake the active sector by 2024, as a positive.
“In a way we have the best of both worlds, because we’re very low cost and active. Passive investment is an industry trend and I don’t think it will go away.
“Frankly for an active manager the more passive the market gets the better because that’s where you get an opportunity.
“Passive money doesn’t think, it just goes with the crowd. Active managers have to be active and they have to differentiate themselves and have to perform.”
SIT’s low-cost structure lets him disregard regulatory sabre-rattling about the actively managed sector’s alleged poor value, closet tracking, lack of transparency and “price clustering”.
His energies are concentrated on seeking out the “99 per cent of stocks that most investors would say were rubbish”.
SIT differentiates itself as a champion of the globally unloved, or insufficiently loved companies, including out-of-favour retailers like Marks & Spencer and Tesco, or, its biggest holding Treasury Wine Estates (see box). The portfolio now includes three catchily-titled categories of investment, shares largely spurned by a market whose fashions Mr McKinnon instinctively distrusts.
The categories are: “ugly ducklings”, shares with an uninspiring immediate outlook, “change is afoot”, companies whose progress is still uncredited by the herd, and “more to come”, companies whose progress is underestimated.
“I’m a contrarian by nature” he says. “Even when I’m watching the news, I think, ‘Hmm, I wonder what the real story is here?’”
“Companies can become fashionable and they can become unfashionable. We think there is often more profit in the unfashionable areas. You can make money in fashionable areas too, but it’s not an approach we favour. When things look gloomy people get turned off by a company’s story. That’s our hunting ground. Things don’t need to get better, they just need to stop getting worse for a five per cent dividend yield to become a six per cent dividend yield, with a 20 per cent gain.”
Brought up in the Wirral in Cheshire before studying economic history at Edinburgh University followed by an investment MSc at Stirling, Mr McKinnon cut his teeth as a small firms expert at Tilney Investment Management in Liverpool.
He says: “The UK looks cheap – plenty of ugly ducklings there”. He cites Brexit and Trump surprises as examples of how the crowd “isn’t always right”.
“It isn’t always wrong either, but you need to analyse each situation. You need to question the wisdom of the crowd. That is where we fit in,” he adds.