STS Global Income & Growth Trust (formerly Securities Trust of Scotland) has announced results for the year ended 31 March 2023. Unfortunately the trust underperformed, the NAV return for the year was -1.8%, and the share price total return was -4.8%, compared to a total return of +0.5% in the Lipper Global – Equity Global Income Index. The total dividend for the year will be 6.20p, an increase of 5.5%. This was covered by revenue allowing the trust to add to its dividend reserves.
In the year to 31 March 2023, 1,616,500 shares were repurchased at an average discount of 1.9% and 1,575,000 shares were issued at an average premium of 1.2%.
The £15m multicurrency facility that the company has had available since 2016 is due to expire in September of this year. Negotiations are underway to replace this facility with an appropriately flexible facility that will allow the manager to utilise the debt in a cost effective manner with the objective of enhancing returns to shareholders over time.
The name change was a surprise to us – the board made the decision on 5 June. The idea was to come up with a name that better explains the company’s aims and objectives. The investment mandate and strategy remain the same. [Our thinking is that it is a bit bland, and the ‘STS’ bit of it doesn’t mean anything to investors and isn’t very searchable.]
Extract from the manager’s report
The last 12 months have demonstrated once again the power of branded consumer goods. At a time of rapidly rising interest rates driven by the re-emergence of inflation, our consumer staples portfolio companies have been able to raise prices to offset these headwinds. The combination of well-loved brands, the habit of repeat purchases and powerful distribution networks enables these companies to generate attractive and sustainable returns on capital employed. It is these same competitive advantages that gives these businesses pricing power. They also benefit from having limited capital requirements. This strength has been rewarded by investors over this period as four out of the top five contributors were consumer staples companies. These were Unilever, PepsiCo, Philip Morris and Hershey.
The fifth most significant contributor was Swiss healthcare company, Novartis. This is a high-quality franchise that remains excellent value. Recent results have been received well by investors as they re-appraise the steady if unspectacular growth of this company. The shares have begun to appreciate after a long spell of dull returns.
The key source of underperformance was our real estate investments. Of the three which we hold, two – Vonovia and Boston Properties – were the greatest detractors to performance over the year. The scale of the rise in interest rates and the pace that they have risen has been remarkable. The effect of this change is likely to be felt in the economy and markets with a lag. The impact on property has been far more immediate. For each of these businesses we believed there was a specific reason to invest.
Vonovia is the largest listed owner of German residential real estate (as well as having some exposure to Sweden and Austria). With property in Germany valued at a discount to replacement cost and bolstered by structural factors such as urbanisation and a trend towards smaller households we viewed this an attractive asset. This was further supported by an interest rate that was arguably too low for the German economy since it is set at the EU level. Unfortunately, these trends were overwhelmed by the shift in the structure of interest rates. As detailed below, Vonovia was subsequently sold and was no longer part of the portfolio at the year end.
Similarly, we believed Boston Properties to be attractive owing to its ownership of A grade office property in the coastal cities of the US. It is our contention that the current post-COVID norm of hybrid working practices is unlikely to outlast a more difficult economic environment. However, this trend reversal is taking time and when combined with a rising cost of capital caused the shares to decline in value.
The next two holdings which detracted from performance were both in the healthcare sector, broadly defined. Roche, like Novartis (see above) is a high quality Swiss pharmaceutical company. It also has an excellent diagnostics business. The underperformance of the shares derives from a spike in the share price which coincided with the end of March 2022. It is the retreat from this precipitous high that is captured in the poor showing over the last 12 months rather than more worrying operational concerns. The shares remain excellent value.
Medtronic is a high-quality medical technology franchise covering a range of therapeutic and diagnostic medical products. The company suffered during COVID as many elective procedures were postponed. However, it has been rather slower to recover from this disruption than we would like. There have however been some encouraging signs recently including the approval of a new insulin management device for diabetics. The shares remain in the portfolio.
Finally, Domino’s Pizza was weak during the year. We continue to believe this is an excellent business trading at a very attractive valuation. The last few years have been marred by friction between the company and the underlying franchisees as well as several management changes including the loss of the CEO, for whom they have yet to find a permanent replacement. Further, investors have worried about the health of the UK consumer. These concerns have weighed on the shares. We believe that these problems will ultimately be solved, and the strategic direction of the business is becoming clearer. We are patiently waiting for the improving operational momentum to be reflected in the share price and it remains a long term investment for the Company.
STS : Fairly flat returns from STS Global Income & Growth