Securities Trust impressing as unrestricted global fund

Business Correspondent/Personal Finance Editor

Monday 15 October 2012

THE reinvigoration of one of Scotland's oldest investment companies Securities Trust of Scotland (STS), founded in Edinburgh in 1889, has come as a welcome boost for its managers Martin Currie.

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SIMON BAIN

The Edinburgh investment house, independent but 25% owned by US private equity, is in recovery after a steep loss of funds and regulatory fines in the UK and US.

However, STS, at £130 million a small but high-profile chunk of Currie's £4.65bn of assets, has delivered impressive performance since reinventing itself last year as one of a new breed of unrestricted global funds, while retaining its now fashionable mandate to seek income for share-holders alongside capital growth.

Although Currie stresses its team-based investment process, it appears to have unearthed in manager Alan Porter a doughty ambassador, unafraid to tie the trust to the toughest of benchmarks which he has so far managed to match or outpace. The MSCI World High Dividend Index has beaten the world index by an annualised 2.8% a year since its inception in 1995, but is not used by any other fund (perhaps because it has performed so strongly) and more strangely is not even tracked by an exchange traded fund. The typical City view might be that choosing an easier benchmark is better for the investment house – and the fund manager himself. However, Mr Porter says many income funds use arbitrary combinations of a world and UK index, which are artificial and do not reflect the universe of stocks they invest in. "The beauty of this strategy is that we have a benchmark that sounds really sensible and is the closest to what I am trying to do – and if you look at its 16-year history, it does blinking well," he said However, this exotic index is not as high risk as it sounds, as it includes only higher-yielding companies screened for the ability to pay sustainable dividends. It also enables STS to hold only around half the top 10 UK stocks typically held by income funds, giving it more choice and less concentration. The trust currently has just 48 stocks, which must all exhibit a combination of a decent dividend yield and some dividend growth – not one or the other. It has also cleaned up its charges, levying a straight annual fee of 0.6% and claiming a total expense ratio of just under 1%, so is well-positioned for the new commission-free world of independent advisers. Mr Porter, 42, started at Scottish Amicable in Glasgow, then spent 17 years in London with Hill Samuel and Insight before joining Currie in late 2008. A year later, he began developing the global equity income strategy which led to Currie's small UK equity income Oeic being converted to a global mandate two years ago. Simultaneously the board of STS, then a UK growth and income fund, was looking for a way to differentiate the trust and also recover from a hostile bid in 2005 which had weakened its reserves. Last August, after a manager pitch, STS switched its mandate to Mr Porter's global model. In the first 12 months, the trust delivered a 25% rise in the share price on the back of a 14.4% rise in net asset value, beating the 12.5% rise in the benchmark index. It has issued three million new shares since June in response to demand and is trading at a premium of almost 4%. The dividend is up modestly but reserves are up by half. Mr Porter says the fund draws on expertise right across Currie's 30-strong investment floor in Edinburgh. "You are not buying me when you buy STS you are buying a whole team behind this." The risks in Currie's funds are intended to be stock-specific, not related to macro-economic, regional or thematic trends, so there is no house economist to consult. On the outlook, Mr Porter says: "Margins are at all-time highs, cash flows and balance sheets are strong, we are seeing some really punchy dividend increases – the flipside, however, is that companies are showing very little confidence in the future in their capital expenditure plans and merger or acquisition activity. Long term that is worrying because one wonders where growth is going to come from."

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Securities Trust impressing as unrestricted global fund

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