The big news of the week in the investment companies sector is probably Troy Asset Management securing the management contract for Securities Trust of Scotland from Martin Currie.
Securities Trust is a £200m global equity income fund. Troy already has a UK equity income trust and Personal Assets, a global absolute return trust, both of which are popular with investors and expanding. They’ll be hoping that they can pull off the same feat with Securities Trust.
Under its previous manager, Mark Whitehead, Securities Trust had seen some improvement in its performance both relative to its benchmark and its peer group. When Mark announced that he was planning to leave Martin Currie, the Securities Trust board felt it needed to review the trust’s future.
The global equity income sector doesn’t have that many constituents. The largest, by some way, is Murray International – which I wrote about last week in a Citywire article – there’s a link to that here. Baillie Gifford’s fund in this sector is Scottish American, JPMorgan has JPMorgan Global Growth and Income and Janus Henderson has Henderson International Income. The only other trust in the sector is the global equity income portfolio of Invesco Perpetual Select Trust, which is just £50m.
The yield on the MSCI World Index was 1.9% at the end of August. The global equity income trusts yield between 2.7% and 5.5%. There is a debate about the best way to manage these portfolios – do you buy stocks that trade on above average yields and pay dividends that are covered by revenue or do you invest in faster-growing but lower-yielding companies and top up your revenue by distributing capital profits? The JPMorgan fund falls into this latter category. Scottish American just operates with the sector’s lowest yield.
The new manager of Securities Trust will be James Harries. James manages the Troy Global Income Fund, a £388m open-ended fund that was launched for him on 1 November 2016.
Between that launch date and the end of August 2020, the open-ended fund returned 30.8%. This represents underperformance versus the MSCI World Index by 12.2 percentage points over that period. However, this has been a period where income-style mandates have struggled relative to growth funds. The Troy Global Income Fund is 11.1 percentage points ahead of its IA Global Equity Income peer group, since launch. More interesting perhaps, the open-ended fund’s returns are 6.4% ahead of those of Securities Trust over the three years ending 31 August 2020.
The open-ended fund makes a point of not investing in cyclical and highly capital-intensive businesses. The style emphasises free cash flow generation (helpful when it comes to paying dividends). That stance has served the fund well. It did not own any oil companies ahead of the oil price crash earlier this year. It also had relatively high exposure to consumer staples companies, whose defensive characteristics have been sought after in recent times.
James takes a long-term, high conviction approach and evidence of that is that no new holdings were added to the portfolio over the whole of 2019 and only one stock was sold in its entirety.
When Troy gets hold of Securities Trust’s portfolio, expect to see some major changes. None of the top 10 holdings in the trust features in the top 10 positions of the open-ended fund. To be honest though, to me the Troy fund looks more like an old-fashioned income fund – with big positions in tobacco, pharmaceuticals, PepsiCo, Unilever and Reckitt Benckiser – while Securities Trust holds Microsoft, Taiwan Semiconductor, Samsung and Tencent.
Securities Trust paid 6.41p in dividends for the year ended 31 March 2020, which puts it on a historic yield of about 3.3%. The announcement says that “future dividend payments will reflect the revenue earned by the portfolio and as a result the dividend payment for the year to 31 March 2021 will be reset to a more sustainable level of at least 5.5p”, equivalent to a yield of about 2.8%. That seems a bit meagre to me but it still just ahead of Scottish American and a decent premium to the MSCI World Index.
Troy seems to have big ambitions to grow the trust if its charging structure is anything to go by – fees are in a tiered structure with lower fees kicking in at £750m and £1bn. It will be interesting to watch its progress over the next couple of years as all of these funds negotiate the fallout from COVID and the extraordinary measures that central banks and governments are taking to shore up economies. An ‘old-fashioned’ defensive portfolio might be a good place to be.