Looking into 2023 after a tricky year for the markets and investors are still presented with a significant amount of uncertainty around interest rates, inflation, recession, war and more.

For those who want exposure to stocks but with a measure of protection, investment trust Securities Trust of Scotland (STS) looks a sensible option.

WHY THE TRUST HAS A CAUTIOUS APPROACH

The investment manager Troy Asset Management, has a cautious philosophy and aims to achieve rising income and long-term capital growth through investment in a portfolio of global equities.

A balanced approach and diversified exposure to the team’s best ideas should leave the portfolio well placed to withstand whatever confronts it over the next 12 months. The shares trade roughly in line with net asset value.

Over the past 12 months Securities Trust of Scotland has achieved an 8.6% positive total return versus -3.8% for the MSCI All-Countries World index in sterling, according to FE Fundinfo. To put that in context of some of the most popular global funds among retail investors, over the same period Fundsmith Equity (B41YBW7) and Blue Whale Growth Fund (BD6PG78) both saw negative returns at -8.5% and -22.5% respectively.

Since Troy took over managing Securities Trust of Scotland in November 2020 it has generated a total return of 21.6%.

Steered by James Harries and Tomasz Boniek, it has a concentrated portfolio with a total of 33 holdings and the top 10 accounting for nearly 50% of the portfolio. A lot of the names will be familiar to investors including US soft drinks and snacks giant PepsiCo (PEP:NASDAQ), as well as consumer goods names Johnson & Johnson (JNJ), Unilever (ULVR) and alcoholic drinks outfit Diageo (DGE). The trust also has holdings in Philip Morris (PMI:NYSE) and British American Tobacco (BATS).

In their latest commentary Harries and Boniek explain why they recently added chip maker Texas Instruments (TXN:NASDAQ) to the portfolio: ‘While other semiconductor companies have to constantly design and manufacture new CPUs to satisfy the insatiable need for greater computing power, TI chips work for decades. We believe that roughly half of TI’s sales derive from chips designed more than 10 years ago. The result is a business with little technological risk and relatively low capital intensity.’

WHAT THE MANAGERS SEEK

This reasoning tells you everything you need to know about the trust’s strategy – the managers like solid, reliable businesses which don’t need large amount of money to grow and therefore have cash left over to reward shareholders.

Because they avoid cyclical stocks and look for businesses which are conservatively financed, the portfolio should be insulated from the impact of higher rates and any downturn in the economy. The emphasis is also on firms with competitive advantages which can generate high returns on capital in the long term.

These advantages can be derived from investing in companies that own strong brands which produce habitual repeat purchases, have persistent demand and high switching costs like Japanese gaming firm Nintendo (7974:TYO), or exposed to non-discretionary spend such as healthcare.

The managers also put a real premium on meeting face-to-face with the companies they invest in: ‘We think like business owners. If we
were to buy the proverbial newsagent around the corner, we would of course visit the shop and talk to the owners.

‘When we invest in a publicly listed company, we are buying the business, not trading the shares. Therefore, as business owners, one of our main responsibilities is to visit the companies we own. No amount of desk research produces the same insights one could gather from observing companies at their premises.’

A FOCUS ON DIVIDEND GROWTH

Securities Trust of Scotland pays a quarterly dividend with a yield of 2.6%. There is an emphasis on stocks who are growing their income rather than ones which trade on higher yields but are at greater risk of cutting their dividends.

Research group Kepler comments: ‘The focus on strong balance sheets, good management and sustainable earnings looks like an attractive strategy in a troubled economic climate. We note that historically the managers’ portfolios have tended to perform well in market drawdowns, which is likely to be reassuring given the risks that currently abound.’

The OCF (ongoing charges figure) of 0.93% is a touch higher than the average for the AIC Global Equity Income sector. This perhaps reflects the relatively small size of the trust but as Kepler observes: ‘Troy has demonstrated a track record of successfully growing other trusts such as Personal Assets (PNL) and Troy Income & Growth (TIGT), so investors may very well enjoy a fall in the OCF in due course.’

DISCLAIMER: Daniel Coatsworth who edited this article owns units in Fundsmith Equity Fund.

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