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When Mark Whitehead took over the Securities Trust of Scotland (STS) last May performance of the global equity income investment trust was struggling. Since then, a combination of the weaker pound boosting overseas investments after the Brexit vote and a looser investment policy have seen it start to close the gap with rivals.
This can be seen in the way one-year performance figures have caught up with its three-year returns. Over one year the portfolio's NAV has grown 31.2%, with the share price advancing nearly 37% as their discount - or gap to NAV - has almost halved to 3.6%, according to Numis Securities data.
Over three years, the NAV grew 40% but with the discount widening over the period this meant shareholders received a total return of just 34.3%, less than the one-year return.
In this video interview Whitehead discusses how replacing the trust's previous benchmark, with a more 'unconstrained' remit helped him turn around the performance and reveals and where he is finding opportunities.
Joshua Thurston: I’m here with Mark Whitehead, who manages the Securities Trust of Scotland. Mark - when you took over the fund last year it was underperforming - what changes have you made to counter this?
Mark Whitehead: Well I spent a lot of time with the board during the first six months at Martin Currie, having arrived last year. What we have done is remove the benchmark that the trust was using, which was the MSCI High Yield Dividend index. We have replaced that with an unconstrained remit. We have done that because we want to be able to invest globally and to not just be benchmarked against 300 names in that index. There’s a lot of turnover in that index, but also it has quite a lot of concentration risk.
So we wanted to broaden the investment horizon, so we have got a lot of companies we can look at across the globe. There are over 2,000 in the MSCI ACWI index and the board has charged me to beat the peer group, which is an amalgamation of the Investment Association open-ended fund peer group, as well as the AIC closed-ended peer group for global equity income on a three-year rolling basis. So it is just about 100 funds that I have got to try to beat.
JT: Given this wider remit that you have got now, where are you finding opportunities?
MW: I think generally income funds tend to invest in companies that have got quite high pay-out ratios, so they are paying out a lot of the earnings that they are producing by way of dividends. What we have actually changed is that we are starting with growth. We are really looking for companies that are growing over the long-term and they are benefiting from long-term structural trends in markets to be able to drive top-line growth or revenue growth.
So what are we looking at? We are looking at demographic trends, the consequences of ageing, the increased proliferation of data, for example. We are trying to find long-term structural trends that our companies are also identifying themselves to be able to drive their product and service provision ongoing.
So, tobacco is an area we have reduced exposure to recently because they can be seen as bond proxies, if you like. People are worried about bond yields starting to rise in the US and these companies are quite expensive after years of good performance. Although, we are finding great value in the likes of Philip Morris in terms of their new product line-up.
But we are also finding smaller companies that we are able to invest in now, such as an IPO we got involved in, which is the Civitas Social Housing IPO. As a company it has a £350 million market cap that is going be benefiting from structural strong demand for social housing in the UK. There’s about 4 million people on a waiting list for social housing, but also a lack of development supply.
So reducing the market cap, reducing the amount of time that is spent by the analytical community on the really large cap stocks that are perhaps ex-growth. And really trying to centre on more growth for the future to generate more sustainable income and capital return.
JT: What challenges have you faced recently with the fund?
MW: I think this year  has been an exceptionally volatile period for markets, not so much on the headline level because markets have been very strong, but certainly what we have seen underlying are big shifts in the sectors that are moving in markets.
We have certainly seen strong performance from the tech space. Banks for example in the US and to an extent in Europe have done well of late, as people have been trying to think about how Mr Trump’s reflationary policies might drive more fiscal spend and better economic growth in the future. But also will lead to higher interest rates, which has led to people speculating that the yield curve will steepen. And that would be good for banks and bank lending - and certainly for their net interest margins. That sector has rallied quite aggressively.
My job is to try and invest over the long-term, not to second guess where markets are moving in the very short-term. We think we have a nicely balanced portfolio across all of the global regions, but also across sectors to give diversity. But hopefully all of our companies will continue to produce very strong performance.
JT: Thanks for coming in to talk to us today.