STS Global Income & Growth: July 2023 investment trust update

• James Harries is a highly experienced income manager with an enviable track record
• Sheltering investors’ wealth when markets are volatile is the overarching focus of Troy’s approach
• Significant changes have been made to the trust since Troy took charge in November 2020

How it fits in a portfolio

Please note as of 5 June the trust’s board of directors officially changed the trust's name from Securities Trust of Scotland to STS Global Income & Growth Trust.

STS Global Income & Growth aims to deliver long-term income and capital growth. The manager aims to grow the income sustainably over time rather than seeking higher but potentially unreliable yields and focuses on high-quality companies. He believes investing for income globally is optimal as it provides a broader hunting ground than one country or region.

Given its focus on quality, this trust could work well alongside other investments in out-of-favour companies with recovery potential – also known as ‘value’ investing. It could also complement those targeting greater growth that don’t tend to pay dividends. Its global reach may also add diversification to an income-focused portfolio.

Manager

Martin Currie was responsible for managing the trust since launch in 2005 but following the departure of manager Mark Whitehead the Board looked elsewhere for a replacement.

Troy Asset Management was appointed as the new investment manager in November 2020 with senior fund manager James Harries at the helm. Prior to joining Troy in 2016, Harries worked at Newton Investment Management (who are owned by BNY Mellon) where he managed global income funds from 2002 onwards. Harries is one of the most experienced global income managers around and we hold him in high regard.

Harries also manages Trojan Global Income, an open-ended fund that invests in a similar way to this trust. This fund currently features on the Wealth Shortlist. He’s also co-manager of the recently launched Ethical Global Income fund. Given the cross-over between these three portfolios we believe Harries is comfortably able to manage his time. We think he’s got one of the strongest track records in the sector, and we like his simple, disciplined, and patient investment style.

Tomasz Boniek supports Harries on his hunt for quality companies around the globe. He joined Troy from Susa Fund Management in 2017 and holds an MBA from the London Business School.

Process

Harries’ approach has all the hallmarks of a Troy portfolio – a focus on large, financially sound companies, that have shown their resilience through both good and bad times for the wider economy. He has scope to invest anywhere in the world but tends to favour developed markets, such as the US, Europe, and the UK. Although he can invest in higher-risk emerging markets, he tends to avoid them, preferring companies that sometimes sell their products in these regions.

His team pay close attention to free cash flow, a key measure of dividend sustainability. It shows what’s left over from running operations that can then be used for other purposes like paying a dividend, buying back shares, or reducing debt obligations. A company that generates healthy levels of free cash flow will, in theory, be able to sustain, or even increase how much they return to shareholders.

Every holding must pay a dividend, but the fund doesn’t have an income target. Harries is more focused on total return, a combination of income and growth, than income alone and won’t chase an unsustainable yield that is potentially damaging to long-term returns.

This is a concentrated portfolio of between 30-50 holdings. That means each company can have a significant impact on performance, although it’s a higher-risk approach. Sector-wise consumer staples, technology and healthcare are where the manager finds the most opportunity.

When making any investment, the long-term is at the forefront of the team’s analysis. They don’t tend to react to short-term blips in the stock market or wider economy, preferring a low turnover approach, which means new purchases and sales are kept to a minimum. Only a few new ideas are considered each year, and the manager only sells shares if he feels the outlook has changed, the company becomes too highly valued, or he finds a better idea elsewhere. Troy conducted a spring clean when they assumed management in November 2020, resulting in significant changes to the underlying holdings in order to bring it in line with their approach.

More recently, in keeping with the managers long-term approach, activity in the portfolio has been limited. British pharmaceutical and biotechnology company GSK was sold off the back of strong performance. Whereas American financial service company Western Union and European real estate investment trust Vonovia SE were also sold in order to improve the quality of the portfolio. This funded two new additions to the trust, UK car insurance company Admiral Group and US semi-conductor manufacturer Texas Instruments. The team believe Admiral’s expertise in underwriting leads to an extensive data set affording accurate pricing of risk. As such the company makes an underwriting profit over the cycle that leads to consistent profitability and limited capital requirements. The company can therefore pay a healthy reliable dividend, though remember dividends are never guaranteed. Texas Instruments designs and manufactures relatively “simple” chips that have incredibly long shelf lives compared to competitors. With no need to constantly design and manufacture new CPUs it eliminates some of the technology risk and means the business has relatively low capital intensity.

Investors should be aware that the manager has flexibility to use derivatives and gearing (borrowing to invest) which, if used, adds risk. As at the end of May 2023 gearing stood at 7%.

Culture

STS Global Income & Growth was established in 2005 and is a constituent of the FTSE SmallCap index. It’s currently managed by Troy Asset Management, an independent ‘boutique’ investment company. The majority of the business is owned by the managers and fund managers. We view this positively, as it means both the business and the funds are run with a very long-term view and managers’ interests are aligned with investors.

Sheltering investors’ wealth has always been the most important thing at Troy. The managers believe that’s the best starting point for growing wealth over the long term. All Troy funds are run along the same lines – disciplined and patiently investing in a small number of high-quality holdings. Managers of different Troy funds all contribute to the thorough research of around 175 companies deemed suitable for Troy portfolios, creating a collegiate environment.

ESG integration

James Harries aims to identify and analyse factors which will impact the long-term profitability of a company, including environmental, social and governance (ESG) factors. They maintain close interaction with company management to ensure that they are taking their ESG commitments seriously. Although ESG is a consideration, this is not an ESG trust and when looking at companies the overall risk-return potential is considered more important.

Troy Asset Management has been formally incorporating ESG analysis into its investment processes for several years, and it came from a strong starting point. It has always been focused on the sustainability of returns and the fund managers are long-term investors. In recent years they’ve formalised the way they incorporate ESG and the way they talk to investors about it. ESG is integrated using a materiality-based approach, meaning the managers focus on the issues they deem to be most material. They also have access to third party ESG research.

Engagement and voting is the responsibility of the investment team. All votes are discharged and usually cast in favour of company management proposals unless the team believes investors’ interests are better represented by abstaining or voting against management. They generally prefer to speak with management, and give them the opportunity to change their approach, before casting a vote against. The firm publishes a summary of its ‘significant’ votes in its annual ‘Engagement and Voting Disclosure’ report, along with rationales for voting both in favour of, and against, proposals.

Cost

The net ongoing annual charge for the trust’s last financial year (end of March 2023) was 0.94%, a marginal increase from 0.93% in 2022. This makes it one of the more expensive trusts in the AIC Global Equity Income sector. Whilst higher charges create a bigger hurdle to deliver positive returns, we recognise the value the manager’s added above these charges throughout his career. Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

Since the STS Global Income & Growth trust launched in June 2005 to the end of June 2023, it’s returned 294.99%* vs 278.36% for the AIC Global Equity Income sector. However, for most of this period it was managed by Martin Currie with a different approach. It’s also worth noting that a discount control mechanism was introduced when Troy took over to ensure the net asset value (NAV) and share price don’t stray too far from each other.

Harries has an enviable long-term track record managing global income portfolios. Since becoming manager of this trust in November 2020, its share price has grown by 23.29% to the end of June 2023 vs 20.35% for the AIC Global Equity Income peer group. The NAV has risen by 23.25% over the same period. This is a short amount of time though and remember past performance is not a guide to the future. All investments will fall as well as rise in value so you could get back less than you invest.

Over the 12 months to the end of March 2023, the trust’s NAV fell 1.90%, while its share price decreased 4.77%. This compares with a fall of 5.26% for the AIC Global Equity Income peer group. The trust’s real estate investments were the biggest drag on performance. Vonovia SE and Boston Properties both performed poorly as interest rates began to rise and real estate investments had a significant increase in capital costs causing shares to decline in value. Roche the Swiss pharmaceutical company also detracted on performance. It had a strong start to 2022 however, and has since retreated from its highs. The managers believe the company remains excellent value.

It wasn’t all bad news though. The trust’s consumer staples names were the largest contributors to performance. Unilever, PepsiCo, Philip Morris and Hershey all benefited from strong pricing power and brand recognition. As inflation increased these companies were able to pass on rising prices to consumers to offset the inflation headwind without demand for their goods being largely affected.

At the time of writing the trust trades at a discount to NAV of 1.57% and yields 2.75%, although remember yields are variable and not guaranteed or a reliable indicator of future income.

Past performance is not a guide to the future. Source: *Lipper IM to 30/06/2023

Chart showing rolling 5 year share price performance

Past performance isn't a guide to the future. Chart provided by FactSet, data typically delayed by 2 or more trading days. Updated daily.

FIND OUT MORE ABOUT The STS GLOBAL INCOME & GROWTH PLC INCLUDING CHARGES

VIEW STS GLOBAL INCOME & GROWTH PLC KEY INFORMATION DOCUMENT

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