Emma Wall: Hello, and welcome to the Morningstar series 'Why Should I Invest with You?' I'm Emma Wall and here with me today is Alan Porter, Manager of the Securities Trust of Scotland.
Hello, Alan.
Alan Porter: Hello, Emma. How are you?
Emma Wall: I am very well. Thank you.
Porter: Good.
Wall: So, the trust used to be purely income from U.K. stocks, but now it's global, and in particular, there is a large allocation to the U.S., which I think will surprise lot of investors because we've got a healthy dividend here, but people still think of the U.S. as a country that does buybacks rather than pays out dividends, no longer the case perhaps.
Porter: I think it's absolutely true what you say that U.S. companies when they are thinking returning money to shareholders do split it between the dividend and share buybacks and they are much more into share buybacks than companies around the rest of the world, but don't forget the U.S. is the biggest economy and we have a truly global benchmark, I think one of the few global growth and income funds that do and the U.S. still manages to make up a decent 40%, 45% of that and that's why we have that kind of exposure and we are marginally overweight in the U.S. at the moment.
Wall: You talked a little bit there about how massive the U.S. is, how many fantastic opportunities there are. When you are looking for equity opportunity, is there a benchmark in your head when you are thinking, if they are not paying at least a 3% yield, they are not going to be included in the trust or is it much more about dividend growth?
Porter: Actually, it's a combination of the two; one thing we've always been really clear about is the objective that we have for Securities Trust of Scotland and that is quite simply to offer shareholders both an attractive and rising income or dividend if you like as well as the potential for long-term capital growth.
For me, I kind of read through that capital growth is being effectively dividend growth; dividend growth is a great proxy for cash flow growth and that in and itself is a great proxy for capital return in shares, so really we're after that combination of both and we've never run a barbell strategy, going for some really high-yielding stocks that don't grow at all or for some really low-yielding stocks that maybe have a lot of growth and quite simply because our fundamental philosophy is that companies that offer that combination of an attractive dividend yield and attractive potential dividend growth as well as relatively stable cash flows, outperform over time.
Wall: Then you also have quite a high allocation to Europe, and I think, talking about the sort of the companies that you are looking for just then, it may surprise people that there are companies that are in rude health in Europe who meet those criteria.
Porter: Well the three things we look for when we are looking for companies, and number one, an income margin of safety, so plenty of cash flow cover of that dividend, so that we've got optionality for that dividend to grow going forward. Secondly, an attractive valuation margin of safety. We don't want to be paying up for the stocks that we own, and then thirdly, some sort of insight that we might have that might make us believe that the market will look at any individual company more positively. And really, it's just – the geographic make-up of the fund really comes out of doing – looking for those three things from a sort of bottom-up approach.
And what I would say about Europe in particular at the moment, and don't forget this, that QE is a relatively new phenomenon for Europe, and what we find when we had QE in the States, when we had it in – effectively in the U.K., when we had it in Japan that for the following six or nine months after it started in each of those regions or countries and shares there performed really well, and that's partly why we're sort of positioned for an overweight position in Europe as well as actually just finding some attractive opportunities.
Wall: Does that mean that QE is obviously wound down in the U.S., so you are going to be taking money out of there and redistributing it into those places that do have that kind of uplift?
Porter: Well, that's a really good point, where our U.S. weighting is probably lower than it's been for a number of years because of that, but also because it's been and linked to QE as well, has been the strongest market in sterling terms over the last few years. So that valuation margin of safety that I mentioned is more difficult to come by, but you cannot get away from the fact that the whole entrepreneurial sort of ethos in the United States means that there is just plenty of opportunities almost at all times of attractive looking companies to invest in. But, that's the reason why at the moment our U.S. weighting is relatively low compared to where it's been over the last few years and our European weighting is relatively high compared to where it has been over the last few years.
Wall: Alan, thanks you very much.
Porter: You are welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
