Scottish Investment Trust held back by contrarian style this year

Scottish Investment Trust held back by contrarian style this year – Scottish Investment Trust says that, during the 12 months to 31 October 2017, the share price total return was 12.8% and the net asset value per share (NAV) total return (with borrowings at market value) was 11.0%. These returns include a 1.4p uplift from the repurchase of Aviva’s stake in the company at a 10.75% discount. The company does not have a formal benchmark but, by way of comparison, the sterling total return of the international MSCI All Country World Index (ACWI) was 13.3% while the UK based MSCI UK All Cap Index total return was 13.5%. The chairman attributes the underperformance to the fund’s contrarian stance.

The board is recommending a final dividend of 14.5p per share which, if approved, will mean that the total regular dividend for the year will increase by 48.1% to 20.0p and will represent the 34th consecutive year of regular dividend increase. There is also a special dividend of 5.0p per share in order to distribute the income generated in excess of the requirements of the proposed regular dividend. The proposed final and special dividends, which, if approved, will be paid to shareholders in February 2018 will mark the last dividends of the current distribution schedule before we move to quarterly payments. The Board’s target is to declare three quarterly interim dividends of 5.0p, in the year to 31 October 2018 and recommend a final dividend of at least 5.0p for approval by Shareholders at the Annual General Meeting in 2019.

Performance drivers

Below are the top positive and negative contributors to Scottish Investment Trust’s performance in % terms and in terms of the amount of money they contributed to or lost from the portfolio.
Treasury Wine Estates 39.6%, 15.4m   General Electric -34.3%, -4.6m
Rentokil Initial 49.1%, 14.7m                 Tesco -13.5%, -3.7m
Nintendo 51.5%, 8.3m                             GlaxoSmithKline -12.1%, -3.1m
ING 34.4%, 7.8m                                      BT -27.3%, -2.9m
Royal Dutch Shell 22.7%, 4.6m             KDDI -17.2%, -2.7m
BNP Paribas 29.4%, 4.4m                       Baker Hughes -26.1%, -2.5m
Citigroup 38.8%, 4.1m                             Macy’s -22.3%, -2.2m
Microsoft* 25.6%, 3.6m                          CEMEX -13.6%, -2.1m
SAP 20.6%, 3.6m                                     Kingfisher* -13.2%, -2.0m
Comcast* 20.4%, 3.5m                           Tourmaline Oil -35.8%, -1.7m

The * means stocks sold in the year

The manager talks us through these: “Treasury Wine Estates (+GBP15.4m), the Australian wine producer continued to refocus on premium brands to drive higher profit margins. Having delivered outstanding performance since it was bought as an ‘ugly duckling’ in 2015, the company has now graduated through each of our three categories. We now see Treasury Wine Estates as one with ‘more to come’. 

Rentokil Initial (+GBP14.7m) also moved into the ‘more to come’ category after another year of excellent performance. Its transformation from an unloved and underperforming conglomerate to a business focused chiefly on the attractive market for pest control helped the group to deliver strong results. 

We added to our holding in Nintendo (+GBP8.3m), as we were surprised by the muted investor reaction towards the new ‘Switch’ games console. The Switch is an excellent product but, later in the year, as other investors became more enthusiastic and as expectations of future success increased, we reduced our holding. We have also moved this company into the ‘more to come’ category. 

Our bank holdings performed strongly, as they had previously been inexpensively valued and stood to benefit from the prospect of higher interest rates and stimulus policies designed to help the mainstream economy. Our biggest gain was from Dutch lender ING (+GBP7.8m), while we also saw strong gains from BNP Paribas (+GBP4.4m), Citigroup (+GBP4.1m), Intesa Sanpaolo (+GBP2.6m), Bank of Kyoto (+GBP2.1m), Citizens Financial (+GBP2.1m), Sumitomo Mitsui Financial Group (+GBP1.7m) and Standard Chartered (+GBP1.2m). 

The continued rebound in commodities prices helped a number of our investments, with energy holdings a notable beneficiary later in the period. Royal Dutch Shell (+GBP4.6m), produced the biggest gain, as well as BHP Billiton (+GBP2.6m), BASF (+GBP1.8m), Total (+GBP1.7m), Suncor Energy (+GBP1.5m) and Diamond Offshore Drilling (+GBP1.4m). However, we lost money in Hess (-GBP1.1m) and Tourmaline Oil (-GBP1.7m). 

German software provider SAP (+GBP3.6m) gained credit for an encouraging transition to a recurring subscription-based model. Vinci (+GBP2.7m) did well on an improved outlook for the European construction market. RSA Insurance (+GBP2.3m), was buoyed by the continued progress of a turnaround strategy. Good results from Johnson & Johnson’s (+GBP2.2m) pharmaceuticals business helped the business to deliver a solid performance, while Adecco (+GBP2.0m) gained on the prospect of better conditions in the temporary staffing market. 

We consider Tesco (-GBP3.7m), one of our ‘ugly ducklings’, an excellent turnaround opportunity but this was obscured by the proposed acquisition of wholesaler Booker. However, we think that other investors will pay more attention now that this transaction has been approved. Our holding in Marks & Spencer (+GBP1.2m) endured fluctuating fortunes but showed some signs of progress and has a senior management team committed to change. We sold our entire holding in Kingfisher (-GBP2.0m), prompted by a need to raise funds for the Aviva transaction but also because we preferred the outlook for Marks & Spencer. 

General Electric (-GBP4.6m) performed poorly in anticipation of a strategy review update at which new leadership reset profit and dividend expectations. GlaxoSmithKline (-GBP3.1m), also delivered a negative return as the new CEO unnerved investors as to where the dividend lay on her list of priorities. 

Our telecom holdings in BT (-GBP2.9m), KDDI (-GBP2.7m) and China Mobile (-GBP1.1m) did not prove fruitful over the year. BT depressed investors with a disappointing trading update but, in general, we think that these telecom stocks have suffered from a rotation away from the more defensive areas of the market. 

We sold our entire holding in Microsoft (+GBP3.6m) as we thought that the turnaround in the company’s fortunes was adequately reflected in the share price. We also completely sold Comcast (+GBP3.5m) as, although the company is likely to continue to benefit from greater demand for high-speed internet we judged that the valuation already reflected this.”

SCIN : Scottish Investment Trust held back by contrarian style this year



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