Scottish Investment Trust PLC
6 Albyn Place
Phone: +44 1312257781p:+44 1312257781 EDINBURGH, EH2 4NL  United Kingdom Ticker: SCINSCIN

Questor: the manager of this trust is on borrowed time as its board runs out of patience

Last year Questor predicted that shares in Scottish Investment Trust wouldn’t remain static while its dividends continued to rise. We were right – but not in the way we had hoped.

On the dividend front, Scottish has continued to impress, stretching its record of consecutive annual increases to 37 years with a 23.2p-a-share payout last year. But even though the shares have been anything but static since, we hadn’t expected quite the rollercoaster ride they have delivered.

This column last recommended that readers hold the shares in late February last year, just days before the fastest sell-off in global stock market history erupted as Covid struck.

The out-of-favour companies the trust’s manager, Alasdair McKinnon, seeks out were particularly badly hit and shares in the trust plunged. In the space of just four weeks after our recommendation the share price tumbled by 30pc, from 792p to a low of 550p.

Thankfully they have since more than recovered that ground after a resurgence that has gathered momentum over the past three months. Now trading at 830p, the shares are 5pc to the good since our tip.

In fact, Scottish IT’s performance since the turn of the year, a 19pc rise, is better than that of any rival trust that invests in global stocks

But it’s not enough to rescue a long-term record that is lacklustre to say the least. Over five years the shares have delivered 59pc, among the lowest returns of global trusts and well below the 99pc from the MSCI World index, a barometer for global markets.

Questor has acknowledged the trust’s poor record before, but found that much of the reason for its underperformance lay in its “value” investment approach, which had long been out of favour.

Now, however, there appears to be more to it than just that. While the trust’s performance significantly lags that of the global stock market, over the past year it is also behind the returns of a broad basket of global value stocks.

This disappointing record has been enough to spark action from the board, which last week announced a review of the trust’s investment management arrangements. The board has appointed Stanhope Consulting to conduct the review and invited fund managers with experience of running investment trusts to pitch for the mandate.

That could spell the end for Scottish’s approach of keeping investment management in house under McKinnon.

The board emphasised, however, that bids for the mandate would be considered “alongside the current management arrangements, which have delivered strong recent short-term performance”.

Stanhope Consulting has been involved in a number of these “beauty parades” for new investment trust managers and two recent reviews show how the outcomes can differ.

In the case of Keystone, now called Keystone Positive Change, the result has been a radical shift in approach. When Baillie Gifford replaced Invesco as manager, the trust switched focus from British dividend-paying shares to fast-growing global stocks.

But a change of manager isn’t always accompanied by an overhaul. Temple Bar’s replacement of Ninety One with RWC left the trust with a similar focus on British value stocks and coincided with a revival for the investment style.

Scottish IT’s announcement of its review suggests that a radical change is off the cards. Whichever manager the board chooses, it wants to maintain a focus on rising dividends, preserving the one aspect of the trust’s performance from which this column has drawn some comfort even as the shares have lagged.

The dividend has continued to rise even as payouts across the stock market crashed after the pandemic struck, while the 2.8pc yield is among the highest in its sector.

But that on its own is not sufficient to keep holding – returns need to improve. McKinnon needs to demonstrate that he can turn this year’s signs of revival into the foundation of a sustained recovery, or the board needs to find someone else who can.

Either way, the promise of better days ahead now seems more concrete than at any point in Questor’s disappointing four years of holding these shares.

Questor says: hold

Ticker: SCIN

Share price at close: 826p

Read the latest Questor column Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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Monday, June 14, 2021