Securities Trust of Scotland lagged its benchmark a little over the year to the end of March 2015, returning 12.5% on net assets against a 13.4% return on the benchmark. Shareholders did much worse however as a discount opened up leaving them with a return of just 3.1%. The dividend was increased from 4.8p to 4.9p.
North American and UK holdings performed well, but this was not enough to offset European (ex UK) and Asian performance. In sector terms, weak performances in healthcare and consumer discretionary had the biggest impact. The best performing stock was Kraft Foods Group; 3G Capital, Warren Buffett’s Berkshire Hathaway Inc., and their Heinz food business announced a merger with Kraft Foods Group in March 2015. The stock rose strongly in response, reflecting approval of the special dividend Heinz will pay on the closure of the deal, and the earnings power of the new joint entity – which will be a 49:51 ownership split between Kraft and Heinz. Their investment case on Kraft was based on a strong set of assets that could be made more relevant and enjoy a lower cost base – the new owners are likely to realise this potential. Kinder Morgan, the US energy infrastructure company, was also one of their top performers. They say Kinder has benefited from executing on its simple strategy of focusing on stable, fee-based assets that are core to North American energy infrastructure, controlling costs and maintaining a strong balance sheet. In addition, the company altered its structure last year which lowered its cost of capital, allowing it to pursue more investment opportunities as well as offering greater dividend growth and visibility.
The weakest performer was SJM Holdings, the Macau gaming operator. Gaming revenues have been under pressure over several quarters, driven by a weak Chinese macro economy and a changing political climate in China. However, they believe that revenues will begin to grow again in the second half of 2015 as they undergo a cyclical rebound. Swedish media entertainment company Modern Times Group was another poor performer last year as a consequence of the Russia-Ukraine conflict. It has impacted both its business in that region as well as its ownership of a Russian media company.
STS : Securities Trust hit by discount widening