Some Scottish contenders for a cult following

How many more blows can the UK’S veteran star fund manager Neil Woodford take? Last week brought news of a fresh hit to his mammoth £7.7 billion Equity Income Fund, with shares in roadside recovery group AA tumbling more than 20 per cent at one point on news of a dividend cut and profit warning. The pay-out has almost halved – and further cuts look likely.

The shares, which have lost two-thirds of their value in the past year, are one of the biggest holdings in the Woodford Equity Income and Income Focus funds. Woodford bought more shares on the day of a profit warning last August and topped up again in September, taking his holding to more than 14 per cent.

Woodford Equity Income was one of the worst-hit UK income funds in the stock market sell-off. The Woodford Patient Capital investment trust has also suffered. It is among the ten worst performers of all closed-end funds since the start of the year, with the shares down 11 per cent. They are at a record low of 74.6p and their discount to net asset value at a record high of 13 per cent. Woodford shareholding shockers have included Allied Minds, down almost 80 per cent since 2015. Former top holding Prothena is down 38 per cent. Other Woodford casualties in the past year have included Capita and Provident Financial.

“Cult manager” status can be a dangerous accolade – a triumphant wreath that can quickly spring the sharpest thorns. With such a huge fund and hundreds of holdings, casualties can be hard to avoid. And for “contrarian” investors, now might even be the time for opportunistic purchase on a three- to five-year view.

But there are two contrarian trusts in Scotland that merit accolades – though both would shrink from the notion of “cult” status. One is long-time favourite of this column Edinburgh-based Personal Assets Trust (Pat). Since 2000 it has climbed from relative obscurity to a highly regarded fund worth £856 million – this by pursuing a highly conservative philosophy of capital preservation. You will not find it among the top performers of recent years – it has been deeply sceptical of equity valuations for some time. This notwithstanding, its shares have gained 59 per cent over the past ten years compared with a 23 per cent rise for the FTSE All Share Index.

The current portfolio stance is deeply defensive. If you believe further stock market falls are likely this year, this is the trust that will provide most shelter. I cannot help but wonder if an opportunistic mailshot by Pat to investors in Woodford’s equity income fund would not yield a large number of defections by holders keen for a less sleep-troubled life.

The second north-of-the-border defensive fund deserving of greater recognition and status is the independently managed £780m Scottish Investment Trust (Sit). Founded in 1887, it has provided shareholders with an accessible, low-cost way to invest in companies around the world while further boosting returns through the provision of a growing dividend. This it has consistently grown over the years.

Managed by Alasdair Mckinnon, it has pursued a contrarian approach that appears to have avoided the Woodford pitfalls. It has an easy-to-grasp investment methodology, with the portfolio divided into three groups.

First are those it describes as ugly ducklings – unloved shares that most investors shun with a near-term outlook that appears uninspiring. But the present out-of-favour status is seen as an opportunity, with circumstances that could surprise on the upside. These stocks often have a higher-than-average dividend yield, which can provide an attractive income while trading fortunes unfold.

The second category consists of companies where change is afoot – but not yet recognised by the market. Often, they are disliked for historical reasons, with investors unwilling to credit the signs of change.

Third are stocks where Sit sees more to come. Unlike the first two categories, these companies are generally recognised as good businesses but the market does not appreciate the scope for further improvement.

“In our experience”, says Mckinnon, “the best investments can, over time, move along an axis from ‘ugly ducklings’ through ‘change is afoot’ and into the ‘more to come’ category.”

Energy and financial firms account for around a third of the trust’s holdings. Over the past five years, shares in Sit, currently 825p, have risen by 70 per cent. The dividend yield is 2.4 per cent and the discount to net assets is 7.3 per cent. This looks a good choice for volatile-averse investors – and a management style that deserves greater recognition – though don’t dare mention the word “cult”.

There are two contrarian trusts in Scotland that merit accolades