Healthier tobacco helps Securities Trust of Scotland outperform. Mark Whitehead, head of Martin Currie’s newly resourced income team, was appointed as portfolio manager of Securities Trust of Scotland in May 2016. Since taking over, Mark has repositioned the portfolio with a greater focus on companies that exhibit growth and have a strong degree of security in their dividend payouts and some exposure to alternative asset classes and smaller cap stocks has been introduced.
Over the year to the end of March 2017, the fund’s share price and NAV rose by 27.7% and 26.7% respectively on a total return basis over the period under review. This was marginally ahead of the median fund in its peer group, which rose by 26.1% on the same basis. ( From 1 June 2016 the company’s investment performance, on a total return basis, is measured against the median of all relevant open and closed-end peers, sourced from the Lipper Global Equity Income sector and AIC Global Equity Income sector). The total dividend for the year is 5.95p, a rise of 2.6% on last year.
Manager’s report
Mark’s report says that the leading sectors for the fund were those where we held the largest absolute weightings, including financials, healthcare and industrials. The sectors that produced lacklustre returns included real estate, consumer discretionary, telecoms and utilities. At the stock level Chevron, Philip Morris and British American Tobacco produced the strongest absolute returns. He thinks that it is really interesting to see two tobacco firms in the top three performers of the portfolio, against a more cyclical backdrop. This is as a result of the market becoming excited about the tobacco industry’s ability to stem the continual decline of volumes through the launch of next-generation products that reduce the health risks from smoking. Philip Morris’s heat-not-burn tobacco product ‘iQOS’ is beginning to improve the company’s growth profile after strong consumer take up. It should enable the company to generate high returns on invested capital on a sustainable basis which is beginning to be priced in.
Apple, which the fund purchased in early 2016, was among the top five performers. The company has come through a softer demand patch, weathering currency headwinds. And after success with recent iPhone shipments, he believes it is set up well for the launch of the next generation product later this year.
The weakest contributors included EutelSat Communications, Fibra Uno Administracion and Inmarsat. Although they sit in different sectors, the two satellite communications businesses are not dissimilar. Both have suffered from concerns over future profitability and, more recently, have been rebounding. The fund sold EutelSat to reduce exposure but Inmarsat remains in the portfolio. The latter’s business has two main segments, marine & aerospace communications. The market potential of these segments has been continually revised lower by analysts over the past year, but the company is confident that the growth is still available for them – it has just been pushed out a year or so. Fibra Uno, a small Mexican Real Estate position was sold after protracted underperformance culminating in uncertainty surrounding the possibility of trade barriers either physical or tax based being erected by Mr Trump’s administration. Currency weakness also continues to weigh heavily on the stock.
STS : Healthier tobacco helps Securities Trust of Scotland outperform