Scottish Investment Trust overtakes Scottish Mortgage and Alliance Trust with latest results

Scottish Investment Trust has posted a sparkling set of annual results and a 40 per cent hike in dividends to shareholders following a management overhaul instigated in 2015.

The boardroom re-organisation is beginning to bear fruit for the Edinburgh-based investment house, as it posted a net asset value per share total return of 29.4 per cent in the year to October 2016.

This compares to a rise of four per cent in the preceding 12-month period.

Although the trust does not have a formal benchmark, the performance more than matches the MSCI All Country World Index’s rise of 29.1 per cent and far out-strips the 12.3 per cent gain from the MSCI UK All Cap index over the same period.

The return for the 12 months to 31 October also put the low-profile, self-managed fund ahead of better-known rivals such as Scottish Mortgage and Alliance Trust as it took its place in the top quarter of its global sector for the first time in years.

The £754 million company’s chairman James Will, who was formerly chairman of law firm Shepherd and Wedderburn, which also has its headquarters in Edinburgh, said that, while the long-term aim of the trust is to produce above average returns, “it is nevertheless pleasing that the company’s new investment approach has demonstrated early benefits”.

While the SIT has benefited from the post-Brexit slump in the pound, which has boosted the overseas holdings of many global funds, the results also appear to be a vindication of a move to a gutsier, stock picking style under manager Alasdair McKinnon.

Among the changes instigated by McKinnon are a reduction in the number of holdings in the trust from between 70 and 120 to between 50 and 100.

At the end of the financial year it was invested in 70 companies.

Meanwhile, the management team, which is directly employed by the widely held trust, has been reduced in size from 11 to four, all of whom Mr McKinnon said are “singing from the same song sheet”.

Mr McKinnon, who has been at the helm of the trust’s management team for two years since taking over from John Kennedy, said much of the performance was down to his team’s high-conviction stock-picking approach.

“When I took over in February 2015 the board and I looked at the marketplace and looked at the world and said it’s going two ways – there are low-cost tracker funds that mirror the performance of an index and there are highly active managers that people want to invest in,” he said.

“We wanted to go down the route of the highly active approach so had to structure the trust so we could deliver strong performance that would excite investors.

“My natural style is a high conviction approach and we needed to put in place a team that would buy into that.”

Mr McKinnon said the team’s approach means it will look to invest in companies that are being shunned by most other investors, those where “change is afoot” and those that are solid businesses but have scope for further improvement.

Australian wine making business Treasury Wine Estates, which falls into the first category, was the greatest contributor to the £893 million trust’s overall performance, making a total return of £21m.

“Most other investors didn’t want to invest in it because of its history,” Mr McKinnon said. “It used to be owned by Fosters and we bought in August 2015 after a change of management.”

Although primarily a growth fund, Scottish aims to grow its dividend ahead of inflation. It has four years’ worth of revenue reserves so can afford to give slightly more in dividends than it receives from the companies in which it invests. It yields 2 per cent.

Dividends at the trust increased by eight per cent to 13.5p for the year while a special dividend of 9p per share took the total for the year to 22.5p.

That represents a rise of 40.6 per cent on the previous year’s total.

Earnings per share jumped 35.9 per cent to 21.6p from 15.9p, enabling the board to declare a final dividend of 8.25p per share. This lifts the total regular dividend for 2016 by 8 per cent to 13.5p, the 33rd consecutive year it has increased.

The company also announced a special dividend of 9p, up from 3.5p last year, taking the total payout to shareholders to 22.5p, 40.6% ahead of last year.

Scottish has also become cost-conscious, slashing costs by outsourcing back office functions and reducing its investment team from eleven to four in the past two years.

Mr Will said the restructuring of the trust’s management team as well as the outsourcing of most of its administration function to Edinburgh firm R&H Fund Services had seen the annual fee charged to investors fall year on year.

The moves have reduced the annual level of ongoing charges from 0.68 per cent to 0.49 per cent.