Some Scot­tish con­tenders for a cult fol­low­ing

The Scotsman - - Business - Bill Jamieson

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

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