The Scottish Investment Trust recently reported its results to 31 October 2018 with the regular dividend increased by 6 per cent to 21.2p as well as it being the 35th consecutive year of a regular dividend increase.
The share price total return was +1.9 per cent and the net asset value (NAV) per share total return (with borrowings at market value) was +1.1 per cent.
Although the trust does not have a formal benchmark, by way of comparison, the sterling total return of the international MSCI All Country World Index (ACWI) was +3.4 per cent while the UK based MSCI UK All Cap Index total return was -1.3 per cent.
The trust’s manager Alasdair McKinnon (pictured) and his team have consistently maintained a high conviction, global contrarian investment approach.
“We’ve kept up the dividend and increased it slightly and we’ve also paid a special dividend” McKinnon says, “and the reason we can do that is because our style tends to favour a yield in the underlying investments.”
The trust, founded in 1887, has large dividend reserves which would enable it to continue to pay the dividend without any change to the portfolio for about three years – so it has extensive support.
The trust has become more cautious over the last year, and going forward maybe adding more to its reserves, rather than paying special dividends. It has long term debt which is now in cash and not invested in the market.
The biggest of its contrarian plays is to avoid the big technology stocks such as the FAANGs in the US and the Baidu, Tencent or Alibaba in Asia.
“They are big momentum stocks that people think can’t do anything wrong,” McKinnon says. “What we felt was that their valuations are pricing in quite a lot of good news. More importantly, the fundamentals are deteriorating due to such reasons as people not replacing their smart phones as often as the manufacturers would hope, for instance, because they are expensive.”
Added to those pressures are the regulatory backlash against Facebook and Google plus the accelerating trade war between President Trump and the Chinese.
“These take a large proportion of the indices,” McKinnon says. “They have almost become the driver of the stockmarket and we don’t hold them because we think there are too much hopes and dreams invested in them.”
The team at Scottish Investment Trust prefers stocks that offer a better balance of risk and reward, with its biggest current holding in Tesco.
“It was a market darling 10 years ago when it all went horribly wrong. They cut the dividend, had an accounting scandal and took their eye off the ball in the UK.”
McKinnon now sees the new management is implementing a plan to restore profitability.
“We find Tesco interesting because it’s reasonably defensive as grocery shopping is done regardless of what else is going on in the world,” he says.
The team continues to favour Marks & Spencer. “It peaked 20 years ago and now we are seeing an extensive leadership change at the top which is good, and it is a great brand.”
Turning to the US, McKinnon has also invested in retailers, with Macy’s, a department store chain that tends to own its own properties, and Gap, where parts of the business have done better than others.
The US has had a better year with retail than in the UK, where talk about the online retailers and high property rents had an impact, McKinnon explains. The tax cuts in the US have boosted the consumer environment giving traditional retailers a boost.
GAP has three main brands and while the main GAP brand has not done so well, its other brands Old Navy and Athleta have performed really well.
The management has announced it will close some of its flagship GAP stores, thereby saving USD100 million.
“It attracted our attention as it had a good dividend and looked cheap.”
Another investment has been in gold directly through investing in gold miners.
“Gold is one of the few asset classes where you haven’t made money over the last five to six years,” McKinnon says. “It peaked in 2011/12 with the US debt crisis and the Greece and Italy crisis when it nearly halved. So, it’s not done well – which is a good start for a contrarian. It’s always seen as an inflation hedge and this may be more topical now. Over the last few years, governments have been spending money even if they don’t have it, with Trump capturing the public mood – working out that if he gives people free stuff they will love it. So, the US has a 5 per cent budget deficit with no plans to resolve it. All this is good for gold. If you have a big market fall, gold should hold up, but there are a lot of uncertain factors out there.”