UK Edition
Questor: Costly debt and shrinking shareholder base make Scottish Investment Trust one to avoid
Everyone loves a turnaround story, and Scottish Investment Trust is attempting to deliver that.
The trust is almost a year into a restructure, which has brought in a new chief executive and new fund manager Alasdair McKinnon.
The £720m trust has also focused heavily on cost cutting. The trust is self managed, meaning that it does not outsource the management of the assets to an external fund manager but instead it is run in-house by a dedicated team. This means that cost cutting is more in their control, but the downside is that it does not benefit from economies of scale, as a large manager would.
The trust cut its 11 investment staff down to four as part of the overhaul, and has reduced the ongoing charges figure from 0.68pc in 2014 to 0.49pc now. Mr McKinnon thinks this is about as low as costs can go.
The trust has also turned around performance, with 31pc share price return in 2016, compared to 17pc on the FTSE All Share and 26pc for the MSCI World index, which looks more globally.
The compares starkly with its longer term performance, having returned 39pc on a net asset value basis over the past three years, compared to 19pc for the FTSE All Share and 49pc for the FTSE All World.
Mr McKinnon has implemented a more concentrated approach to holdings during his tenure, focusing on “contrarian” buys - namely buying up companies that are out of favour with other investors. Examples of success stories include technology giant Microsoft, pest control company Rentokil and jewelry maker Pandora.
The trust has also worked on boosting its yield, with an 8pc rise to the regular dividend over the year to end of October, and a 40pc total increase, after it issued a special dividend of 9p per share. It marks the 33rd year of rising dividends for the trust.
Some of this special dividend came from the fall in sterling, which in turn boosted overseas assets and earnings. However, the trust has reserves to cover four years of dividends, and Mc McKinnon said the board is very focused on yield, providing some security.
While the turnaround story so far looks good, there is a cloud hanging over the trust. It has a large shareholder that wants to get out and some expensive debt to service.
Aviva has been selling out of its significant investment trust holdings after it merged with Friends Life in 2015. It has already exited its positions in Witan, Mercantile and BlackRock Income Strategies.
Aviva holds a 12pc stake in Scottish Investment Trust, its largest remaining stake in a trust, and so it is likely to be the next on the chopping block.
Where Aviva has sold out of other trusts it had disposed of it on the secondary market, or there have been share buybacks or fund mergers - there is not one universal approach.
This in itself is not reason to buy or sell the trust, as it remains to be seen what exact deal will be struck.
The concern is the expensive debt that Scottish Investment Trust has on its books, to give the option of up to 10pc gearing. It has a £84m debt that runs until 2030, paying 5.75pc interest. Issued 17 years ago, the interest rate looked appealing then but very pricey at today’s rates.
The issue is that if Aviva sells its 12pc stake, the cost of servicing this debt will be borne by the fewer, remaining investors - thus pushing up fund costs.
What’s more, the self-managed structure mentioned above will work against them when this 12pc stake is sold. Having already made drastic cost cuts, it’s unlikely the trust can cut any further. This means the fixed costs of the trust will also be borne by fewer investors, likely pushing that annual charges figure back up again.
Much of the impact of this depends on the exit that Aviva strikes, but it marks too much uncertainty for us to consider. Particularly when other trusts operate in the same space and with a steadier track record. At 9pc, the discount is too great to sell, so hold.
Questor says: Hold
Ticker: SCIN
- Read previous Questor columns at telegraph.co.uk/questor
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