SCOTTISH INVESTMENT TRUST: The manager who ditched consumer stocks and went on the defensive with gold shares as crisis bit
Although manager Alasdair McKinnon was relatively quick off the mark in turning the portfolio of investment trust Scottish defensive, it hasn’t stopped the share price sliding.
Shares in the global fund are down nearly 15 per cent over the past month. It was in the middle of last month that McKinnon decided to overhaul the trust’s holdings.
He says: ‘I had been nervous about markets and the constant euphoria for the past couple of years.
‘Especially when shares in firms such as electric car manufacturer Tesla were shooting up without any supporting evidence of an improvement in its finances.
‘In February, I was due to go out to Japan on a two-week business trip, but it became obvious it wasn’t going to happen. I then began to think about coronavirus spreading out of China, coming here and causing economic shutdown.
‘I realised no company in the UK, Europe or the US would be safe financially, but that some would be more resilient than others.’
So began a restructuring of the portfolio, a process unprecedented in McKinnon’s five and a half years as lead manager on the £475million stock market-listed trust.
A number of consumer stocks, retailers, banks and oil services companies were sold – including Gap, Macys, M&S and banks ING and BNP Paribas.
In their place were bought a number of gold stocks – including AngloGold Ashanti and Gold Fields – as well as sturdy utility companies Severn Trent and National Grid.
It means the trust’s top three holdings, among a portfolio comprising 55 stocks, are all gold related and now account for more than 14 per cent of assets.
McKinnon says he hasn’t traded since shaking up the portfolio.
‘Markets are impossible to guess at the moment,’ he says.
‘The fund is now in defensive mode, but anything could happen in the weeks ahead.’ McKinnon says the emphasis is now on capital preservation.
‘In the months ahead, there will be opportunities in many consumer stocks. But some of these companies, I am afraid to say, will not survive.’
The trust has £100million of borrowings waiting to be deployed when McKinnon – and the trust’s board – believe stock markets have hit rock bottom.
‘It’s part of our firepower,’ he says. While the money sits on the sidelines, it will cost £6million a year in interest charges.
With the trust having more than two years of income reserves squirreled away, McKinnon is confident its 36 years of continuous dividend increases will not be broken by recent events despite the rash of companies cancelling dividend payments.
‘The board maintains that it is their wish to grow the dividend ahead of inflation,’ he says.
‘That very much remains in place. The trust has a strong balance sheet.’
Despite the difficult times, McKinnon says shareholders are supportive. Like most fund managers, he is working from home instead of the trust’s Edinburgh’s offices.
With four children aged nine to 13, he has invested in some ‘noise-cancelling’ headphones.
The trust’s ongoing annual charge is competitive at 0.58 per cent. Income is paid quarterly and is equivalent to 3.84 per cent a year.
Over the past five years, the trust has delivered a total return for shareholders of just over 19 per cent. This compares with a rise of just under 4 per cent for the FTSE All-Share Index.
London Stock Exchange identification number: 0782609.