Standard Life Equity Income light on resources and defensives

Standard Life Equity Income says, in the six months to 31 March 2016 its diluted net asset value total return was 0.7%. This compares with the benchmark total return of 3.5%. The discount on SLET’s shares widened slightly from 0.4% six months ago to 1.6% at 31 March, producing a decline of 0.7% in the share price total return, 4.2% worse than the positive 3.5% return produced by the All-Share index. The Board has declared a second quarterly dividend of 3.40p per share which together with the first quarterly dividend of 3.40p per share brings total dividends for the six months to 31 March 2016 to 6.80p per share.  This compares with 6.60p per share for the six months to 31 March 2015.

The manager’s report goes into the reasons for the underperformance.  The decision not to hold resource stocks Royal Dutch Shell, Glencore and BG Group was a negative for performance as the sector rebounded strongly in the first quarter of 2016, reversing a prolonged period of underperformance in 2015. They remain cautious towards the oil majors as dividends are not covered by free cash-flow, raising questions about the sustainability of dividend policy. Slashing capex and building debt in order to preserve dividends appears, to them, to be an unsustainable policy over the longer term, in the absence of a sharp increase in the oil price.

At a time of falling bond yields, a lack of exposure to a number of defensives names British American Tobacco, GlaxoSmithKline and Unilever hurt performance as risk-averse investors sought shelter from market turbulence. They continue to avoid these names as they think there are more attractive valuation opportunities elsewhere in the UK market.

The holding in recruitment company Staffline detracted from performance, as investors took profits after a period of very strong share price performance. The continued success of management in growing the business is reflected in January’s announcement of a 48% increase in dividend per share.

On a more positive note, the company continued to benefit from not holding several of the large banks, such as HSBC, Barclays, Standard Chartered or RBS. These fell sharply on market fears over deteriorating macroeconomic and credit conditions at a time of continued regulatory scrutiny. Earnings remain under pressure from low interest rates, anaemic loan growth and regulatory fines, which limit the pace at which banks can grow their capital to levels that will satisfy regulators. This in turn constrains the ability of bank management teams to grow their dividend payouts.

Standard Life Equity Income’s holding in software company Sage was a highlight during the period. The latest results underlined the new management team’s success in accelerating revenue growth by improving sales execution and increasing product innovation. Also in the software sector, the holding in MicroFocus was a major contributor to performance. The company delivered excellent results that highlighted better-than-expected revenues and signs of further progress on cost synergies from recent acquisitions.

The position in Rightmove, the property portal, continued to boost performance as the company built on its dominant market position among estate agent, growing its market share while raising prices, having successfully fended off a nascent competitive threat.

SLET : Standard Life Equity Income light on resources and defensives