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Securities Trust of Scotland underperforms in first half

STS : Securities Trust of Scotland underperforms in first half

Securities Trust of Scotland lagged its benchmark (MSCI World High Dividend Yield Index) by 2.4% over the six months that ended on 30 September 2014 – making a 2.6% total return on net assets. The Chairman said stock selection was the predominant reason behind underperformance, particularly within the consumer discretionary sector and in Asia.

Over the same period, the share price has moved from trading at a 2.2% premium to a discount of 3.6% so the return to shareholders was negative 2.9%.

Earnings per share for the six-month period were 2.83p, an increase of 8% on the six months to September 2013. The second interim dividend will be 1.15p paid on 19 December 2014 to shareholders on the register on 28 November 2014.

The manager’s report adds some colour to the Chairman’s statement. At the sector level, relative returns and stock selection were weakest in consumer discretionary and healthcare. By contrast, stock selection was positive in energy, industrials, consumer staples, telecommunication services and utilities. Regionally, relative return contributions were poorest from North America and Pacific ex Japan; these areas were also where stock selection was weakest.  Gearing was a positive, given that the markets rose over the period.

The strongest positive contributors were Kinder Morgan, Direct Line Insurance Group and AbbVie. Kinder Morgan, the US oil and gas pipeline company, performed well on the back of strong results and the announcement that it is planning – subject to shareholder approval – to merge the group companies to help pave the way for superior growth. At the same time, it increased its dividend projections. Direct Line fared well, also because of good results, a 5% increase in its interim dividend, and the announcement of a special interim dividend. US pharmaceutical firm AbbVie also did well over the period. Second-quarter results for the US pharmaceutical firm were good; our investment thesis here is based on AbbVie’s attractive growth profile combined with a low valuation.

The biggest negative impact came from Modern Times Group and SJM Holdings. Modern Times Group, the Swedish-quoted media group, was weak due to its exposure to the events in Russia and Ukraine, where the company has operations.  The Macau gaming company SJM Holdings also fared badly. Overall, the Macau gaming sector performed poorly due to continuing concerns about falling mass-market table yields and rising labour costs squeezing margins across the sector.

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