Proposed change of investment objective and policy
Securities Trust of Scotland plc (the "Company")
Wednesday 25 May, 2011
Proposed change of the investment objective and policy
Today your Board is announcing proposals to change the investment objective and policy of the Company to invest primarily in global equities rather than predominantly UK equities. The Board has carefully considered the relevant issues and has consulted with the Investment Manager and major shareholders who have both indicated their support for the proposed change.
These proposals are conditional upon the approval of Shareholders in general meeting. The Company will shortly be sending a circular (the "Circular") to shareholders containing details of these proposals and to seek the approval of its Shareholders. Terms used in this announcement have the same meaning as set out in the Circular.
The Proposals and rationale
Your Board is proposing to change the investment objective and policy of the Company to achieve rising income and long term capital growth by investing in global equities rather than UK equities. As a consequence it is also proposed that the Company's benchmark be changed from the FTSE All Share index to the MSCI World High Dividend Yield index.
Globalisation / Diversification
In recent years economies around the world have become increasingly global in activity and outlook. This in turn has led to a growing internationalisation of world stock markets, with the country of listing of specific companies becoming less relevant for investors. The UK equity market also suffers from high concentration in a relatively small number of large capitalisation stocks and in a few dominant sectors.
About 90% by value of the developed world's quoted companies are listed outside the UK. The Board therefore believes that investors with a domestic bias are limiting their investment opportunities by excluding from consideration many strongly performing overseas listed companies.
The MSCI World High Dividend Yield index focuses on companies where dividend yields are typically at least 30% higher than that of the MSCI World Index. The following table shows the regional breakdown for the MSCI World High Dividend Yield index:
|
UK Continental Europe |
15.2% 29.8% |
|
North America |
43.6% |
|
Asia |
7.7% |
|
Japan |
3.7% |
|
Total |
100.0% |
Diversification of Income
Over the last 20 years the yield gap between the UK and World equity markets has narrowed significantly. There are now attractive alternative sources of dividend income outside of the UK:
· 90 of the top 100 yielding listed companies in the developed world are outside the UK
· 13 developed countries' markets yield more than the UK
The following table shows the lower income concentration of the MSCI World High Dividend Yield index compared with that of the FTSE All Share by summarising the proportion of total income generated by the largest stocks:
|
|
MSCI World High Dividend Yield Index |
FTSE All Share Index |
|
Top 10 stocks |
23% |
49% |
|
Top 20 stocks |
39% |
64% |
|
Top 30 stocks |
50% |
75% |
|
Top 40 stocks |
57% |
78% |
In recent years a number of large UK high dividend yielding stocks (including BP, Lloyds Group and Royal Bank of Scotland) have suspended, reduced or cut their dividends. This negatively impacted the income paid to shareholders, whose investments were concentrated in such large companies in the UK. The Board believes this is encouraging UK investors to seek greater income diversification from international companies.
The Board therefore believes that expanding the universe of companies from which the Manager may select the portfolio holdings, to include the world's main stock markets should:
· enhance the portfolio's prospective risk adjusted capital returns; and
· improve the level and quality of the income generated from the portfolio over the longer term.
Investor interest
There is a strong interest and demand from UK investors for greater diversification of income away from large UK companies. However, for UK investors searching for higher income, there are currently many more UK equity income oriented funds than international alternatives.
The Company is currently included in the UK growth and income sector of the Association of Investment Companies (the "AIC"), which as at 31 March 2011 includes a total of eighteen trusts with total assets of £6.0bn. The AIC's global growth and income sector at that date comprises six trusts, five of which retain a specific allocation in their benchmark to UK equities and one which has a multi-asset portfolio. If the proposed investment objective and policy changes are approved, the Company will at that time be the only global growth and income trust with a fully global equity benchmark. In such a situation the Board believes that there should be increased demand for the Company's shares, which may help to narrow the discount over the longer term.
Investment Manager
The Board believes that the Investment Manager is well-qualified to manage a global equities portfolio in accordance with the proposed new mandate. As an active equity specialist, the Investment Manager's core business is global equities and the related strategies represent a significant proportion of the firm's assets under management. The Investment Manager has an experienced and deeply-resourced investment team of 57 investment professionals, which combines sector, regional and global expertise in the pursuit of the best investment opportunities.
If the proposed change of the Company's investment objective and policy is approved by Shareholders, the Investment Manager's Global Equities team will manage the portfolio, supported by the full resources of the firm. The Investment Manager will deliver a portfolio of high-yielding global companies - seeking companies with attractive quality, value and growth characteristics. Each holding will be required to have the potential to make a contribution to the overall objective of high and rising income, alongside long-term capital growth.
Dividend Policy
The Directors believe that Shareholders place great importance on the income yield of their investment in the Company. The Board has worked closely with the Investment Manager to develop a new investment objective and policy which it believes will achieve the benefits of greater diversification into global equities, while also maintaining the Company's dividend policy, which will include the payment of dividends quarterly.
Summary
The Board believes that the proposed change of the Company's investment objective and policy is in the best interests of the Shareholders. The Directors' reasoning is set out below:
· The ability to invest in companies overseas provides a much larger universe of opportunities than with a UK based portfolio. It also enables the Investment Manager access to the attractive yields available in many other international markets.
· With a global portfolio, there would be greater diversification of companies, sectors, countries and the associated income generated from the relevant holdings. As a result, over the longer term a global portfolio should have greater potential to generate superior risk-adjusted investment returns than a portfolio restricted to one country or region.
· Although past performance is no indication of future performance, the MSCI World High Dividend Yield index has outperformed the FTSE All Share and MSCI World indices over the last 15 years, with lower levels or similar levels of volatility as shown in the table below.
The following table sets out the annualised returns and volatility for the period since the inception of the MSCI World High Dividend Yield index in June 1995 to April 2011:
|
|
Annualised total return |
Volatility |
|
MSCI World High Dividend Yield Index |
9.6% |
17.1% |
|
MSCI World Index |
6.9% |
16.9% |
|
FTSE All Share Index |
8.0% |
17.7% |
· The Investment Manager has an experienced and deeply-resourced global equities team and is well qualified to capitalise on the opportunities described.
· It is the Board's intention to maintain the current dividend distribution policy for the dividend to increase progressively over the long term; and
· Although there is strong interest and demand from investors for higher yielding global equity funds, the number of investment trusts specialising in this area is currently limited. The Board believes that if the proposed change of the investment objective and investment policy is approved by Shareholders, it should increase market support for the Ordinary Shares.
Transition period
If the proposed change of the Company's investment objective and policy is approved by Shareholders, the portfolio will be transitioned following the General Meeting with effect from 1 August 2011 from a UK equity focus to a portfolio of global equities. The Board has worked closely with the Investment Manager to ensure that the Company's dividend policy is not affected unduly by the process. Careful attention will be paid to the timing of dividend payments from investee companies to maximise income in the final days of July following the General Meeting and in the weeks immediately following the inception of the new objective and policy. Given the nature of the transition process the Investment Manager has agreed to waive the performance fee for the period from 1 August 2011 to the end of the financial year on 31 March 2012.
Effect on the performance fee
Under the Management Agreement, the Investment Manager is entitled to a performance fee calculated in respect of each financial year to 31 March (the "Measurement Period") and payable in arrears.
The performance fee is 15% of the percentage outperformance of the Company's net asset value per share, adjusted for share buybacks, to the extent it exceeds the percentage capital return of the FTSE All-Share index over the relevant measurement period. If the net asset value per share falls in a measurement period, the share of any out-performance is reduced by 50%. This fee is subject to a cap of 0.75% of the year-end net assets.
In addition to the above, a peer group performance fee of 0.25% of year-end net assets may also be earned. The 0.25% of year-end net assets will be allocated as follows:
· 0.25% if the Company's share price total return is in the top quartile of its peer group.
· 0.10% if the Company's share price total return is in the second quartile of its peer group.
· 0.00% if the Company's share price total return is in the third or fourth quartile of its peer group.
The peer group is chosen by the Board, with advice from J.P.Morgan Cazenove, and is reviewed at least annually. Where the peer group is not divisible by four, the 'remainder' will be allocated to the top quartile first.
The performance fee is, therefore, subject to an overall maximum of 1% of year end net assets and is wholly allocated to capital.
If the proposed change of the Company's investment objective and policy is approved by Shareholders, the following associated changes will be made:
· until 31 July 2011 the performance fee as set out above will operate as documented in the Management Agreement;
· with effect from 1 August 2011, the following changes to the Management Agreement will be implemented:
(i) the relevant index for the calculation of the standard performance fee will change from the FTSE All Share index to the MSCI World High Dividend Yield index;
(ii) the peer group element of the performance fee will no longer be included as a result of there being no relevant specialist peer group;
(iii) to adjust for the absence of the peer group element, the factor of 15% applied to the percentage outperformance of the Company's net asset value per share, adjusted for share buybacks, to the extent it exceeds the percentage capital return of the MSCI World High Dividend Yield index over the relevant measurement period, will be increased to 20% with an associated increase in the cap to 1% of year end net assets due to the absence of a peer group element.
· for the eight month period from 1 August 2011 until 31 March 2012, the Investment Manager will waive the right to receive any performance fee; and
· the overall maximum performance fee of 1% of year end net assets will remain unchanged.
General meeting
Set out at the end of the Circular is a notice convening a General Meeting of the Company to be held at Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES at 12.45pm on Tuesday 19 July 2011 at which a resolution will be proposed to change the investment objective and policy of the Company.
Expected Timetable
Latest time and date for receipt of forms of proxy 12.45pm on 15 July 2011
General Meeting 12.45pm on 19 July 2011
A copy of the Circular has been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do
Enquiries:
Tamsin Hooton
Martin Currie Investment Management Limited
Tel: +44 131 479 5948
William Simmonds
J.P. Morgan Cazenove
Tel: +44 207 588 2828
This information is provided by RNS
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