The announcement of a review of investment management arrangements by the London-listed Scottish Investment Trust (ticker SCIN) was yet another reminder of how difficult life has become for fund managers following a 'value investing' style.
The news has prompted me to begin a series of blog posts reviewing the small number of actively managed open-ended funds and investment trusts available to the UK investor and which follow (or at least claim to follow) a value investing.
Given the poor performance of the Scottish investment trust relative to its peers in the Association of Investment Companies' Global sector (Net Asset Value total return of 52.8% over 5 years to 4th June 2021, compared to 398.3% for the growth focused Scottish Mortgage, or more fairly 115.4% for the arguably value-focused AVI Global Trust) it's easy at first glance to see why the board of the Scottish have engaged Stanhope Consulting to "to assist it in the review of the Company's investment management arrangements".
If this sounds familiar, this is because it follows in the footsteps of one of the few trusts in the Global investment trust sector to fare worse than the Scottish over the last five years, Keystone. Following a disastrous period of returns under the ill-fated tenure of former Invesco fund manager, Mark Barnett (a self-styled value investor of sorts) the board of Keystone also engaged Stanhope and in late 2020 announced a change of mandate. Attracted by the extraordinarily strong performance of Baillie Gifford's sustainable growth investment philosophy and Positive Change open-ended fund, Keystone was renamed Keystone Positive Change (KPC).
The perils of pivoting from value to growth just when the former was starting to outpace the latter has been demonstrated by Keystone's NAV rising by just 4.7% against a 15.1% rally in the Scottish's NAV in the three months to June 4th 2021.
Could it be that the board of the Scottish are (potentially) turning away from a value-based approach just when it's on the way back? Although the Scottish's review announcement notes this recent strong performance, the fact that the invitation for other fund management firms to bid did not specify an explicit value-based philosophy, but was couched in very general terms, "designed to deliver, over the longer term, above index returns through a diversified global portfolio of attractively valued companies with good earnings prospects and sustainable dividend growth", hints that a different investment style is on the agenda.
This would be a shame, were a change in mandate to lead to a change in investment style. The global investment trust sector is short of value investing options, and the relative success (so far) of the Temple Bar trust's decision to stick to a value mandate when it changed managers in autumn 2020 is worth noting. See this 30 minute interview from the Quoted Data site with Ian Lance, fund manager of Temple Bar.
That said, the current manager of the Scottish Investment Trust, Alasdair Mackinnon, undoubtedly has questions to answer. The Scottish has only really rallied since early March (share price up from £7 to £8) whilst the wider market has marked time. The early November-February vaccine-driven rally passed it by. The overweights in financials, energy and materials had not been performing well until very recently. Here is a link to the 30th April 2021 factsheet.
Also, a number of open-ended 'value-based' funds available in the UK have shown stronger returns than the Scottish despite the value headwinds in recent years. For example Hugh Sergeant's River and Mercantile Global Recovery Fund has returned 88% in the 5 years to early June, against the Scottish's 52%.
Besides the self-declared contrarian value style of its current manager, The Scottish Investment trust is also notable as being one of very few trusts to manage itself and have the trust as its sole investment vehicle. As of early June, the Scottish is trading on a discount of around 10%. It has among the strongest revenue reserves of any investment trust, covering over two years worth of dividends, and has increased its dividend (current yield just under 3%) for the last 37 years.
It would be a pity if the Scottish Investment Trust's fascinating independent history , stretching back to 1887, came to an end just when value investing might be coming back into favour.
In future blog posts I will update the fate of the Scottish and explore some of the other value investing options available to the UK retail investor.
