Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me is Mark Whitehead. He is Manager of the Securities Trust of Scotland. Hello.
Mark Whitehead: Hello.
Black: Welcome to the studio. So, do you want to tell us a bit about what the trust does?
Whitehead: Sure. Yeah. So, Securities Trust of Scotland really has two remits; that's to produce a yield, which is a premium to the market and that's currently around about 30% to the wider global equity market. So, that's around about 3.4% today. And then, of course, we sit in a peer group of funds that are very, very similar to us. There's about six of us. And we're charged to beat that peer group over the long term. And of course, what we want to do is produce capital growth for our clients, and hopefully over the long term beat the equity market.
Black: So, we're at the start of the year and this is the sort of time when we can make grand predictions.
Whitehead: Yes.
Black: So, where are the areas that you're most positive on for 2020?
Whitehead: Well, I think just having a look back, just as we start to see what happened last year was, it was quite an unusual year. We saw equities really re-rate quite aggressively. So, a lot of the return came from the P/E multiple expanding with little sort of earnings growth really from most major markets. What we see going into 2020 is, again, slightly lackluster growth in terms of the macroeconomic backdrop, but also companies in terms of earnings. So, we don't think we're going to see such a good year in equities. What we do think is though that earnings growth in some of the markets that we invest in, particularly Europe, should be a bit stronger than the U.S.; emerging market should be a bit stronger again, and dividends to really get back to driving a lot of the total return. So, we think our style is actually really well suited to the market that we're sort of moving into, if you like, for 2020.
Black: If you're concerned about earnings growth being a bit lower though, does that mean you've also got concerns about dividend cover or dividend growth?
Whitehead: Well, we spend a lot of time actually looking at our companies and making sure that we are invested in companies that can pay the dividends through the business cycle actually. So, we try to stress test our companies. So, if there are periods where there's slightly lackluster growth, our companies – we should be, from the work that we do, we should be pretty confident they can continue to pay a dividend and hopefully, grow it. So, we're expecting somewhere in the region of sort of 5% to 10% dividend growth from the portfolio. And that should stand us in pretty good stead to produce a decent return of around about the same sorts of levels, sort of 5% to 10% for equity markets.
Black: So, obviously, you're quite positive on emerging markets and Europe. How are you feeling about the UK at the moment?
Whitehead: Well, the UK is quite fascinating, isn't it? I think, obviously, we're going to exit the end of January, just in a few weeks' time. Certainly, what we're seeing is I think there's rumblings from the central bank, from the Bank of England, they may well cut interest rates perhaps in the first half of the year. And then, after that, we should start to see really a bit of pickup in activity, particularly driven, we think there's going to be a bit of a fiscal splurge. I think the numbers that we've seen recently, it could be up to sort of 20 billion spent on infrastructure over the next 12 to 18 months, and up to as much as 100 billion over the next few years. So, that should – because there's a big multiplier effect with that type of spending, it should lead to better economic growth, and hopefully, good earnings growth for corporates, particularly domestics. But we have seen those stocks move quite quickly at the end of last year. So, we really need to see that earnings growth come through for those companies to do well, sort of, later in the year, really. So, we've got one or two stocks that we think will do really well, domestics, and we're quite confident that the U.K. is cheap as a market versus others, and it should do quite well.
Black: Super. Well, thank you so much for your time.
Whitehead: Thank you.
Black: And thanks for joining us.
.jpg)
