WINTER 2018 ANALYSIS AND INSIGHT FROM THE SCOTTISH INVESTMENT TRUST The WINTER 2018 ANALYSIS AND INSIGHT FROM THE SCOTTISH INVESTMENT TRUST ABOUT The Scottish Investment Trust At The Scottish, our experienced team actively manages a high conviction, global investment portfolio with the aim Value investing: is the tide turning? of generating above Growth or value? That has been the question contrarians, we’ve been keeping a watchful average investment on many investors’ minds as markets took a eye on these contrasting fortunes. returns over the longer turbulent turn through the autumn months. term for our investors. Firstly, let’s consider why growth stocks have They represent the two main schools of fared so well. It’s not by chance that the strong Our contrarian approach thought when it comes to investing and performance over the last 10 years coincides is benchmark agnostic investors often try to lump stocks into one with the decade following the global financial and aims to benefit or other of the two categories. Of course, crash. The conditions that ensued have been from profitable it’s not so clear cut as Box A for fast-growing unusually flattering for growth investments. opportunities in any glamour stocks and Box B for dowdy, old Stunned by the severity of the crisis, central market environment. cheap shares – the lines are often blurred. bankers took the unprecedented action Founded in 1887, Both have their draws. Growth stocks of cutting interest rates to near zero and the trust has a long inspire hopes and dreams, and investors launching quantitative easing (QE) – a scheme tradition of providing strap themselves into the love train, usually that injected cash into the financial system paying up for the thrill. Value stocks, on the via the central bank purchase of, mostly, shareholders with an other hand, are the lonely singletons of the government bonds. As growth stocks are often accessible, low cost way stockmarket world – they are priced for their valued by discounting their future cash flows to invest in companies less obvious charms and astute investors can into a ‘present value’ and, given that most of from around the world, their profits will be earned in the future, lower pick up a hidden gem without betting the interest rates made these stocks look far more whilst further boosting farm. Of course, investing is full of ups and appealing to investors using this measure. returns through the downs and no style is ‘right’ or ‘wrong’ all of provision of a growing the time – they go in and out of fashion. This Turning off the tap dividend. The Scottish raises an interesting question – as the rally in But 10 years on, the fuel for this cheap money has grown its regular Follow growth stocks gets long in the tooth, are the appears to be running out. The US has begun dividend every year US value stocks that have been long overlooked withdrawing QE, while the European Central for the last 34 years. a budding contrarian opportunity? Bank plans to make no more purchases beyond December. Central banks’ withdrawal Our independently of accommodative policies, alongside rising managed, closed-ended Cheap money yields, creates an environment less supportive fund structure allows For over a decade, growth stocks have for growth stocks, effectively reversing the been cresting the wave of loose monetary valuation argument described above. us to be patient with policy leaving value stocks languishing in the our investments. doldrums. The tide may be turning and, as Continued: Overleaf Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest. The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. Investment trusts are listed companies and are not authorised or regulated by the Financial Conduct Authority. Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this newsletter should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor. Issued and approved by SIT Savings Limited. Authorised and regulated by the Financial Conduct Authority. WINTER 2018 ANALYSIS AND INSIGHT FROM THE SCOTTISH INVESTMENT TRUST risk and reward of growth stocks is less companies to have strong balance Value investing: is favourable. sheets that facilitate planned change and support dividends to provide us the tide turning? Looking at value through a with income while we wait for the tide contrarian lens to turn. In the current climate, there Continued from: Front Page Contrarian investment is distinct from are many interesting opportunities value investing, but the two styles for contrarian investors. Areas such The trend of increasing interest rates do have some things in common is exacerbated by the rise of populist as Brexit blighted Britain, Europe and at this point in time. Both aim to politicians to power, who are throwing recently battered emerging markets identify undervalued stocks that have budgetary caution to the wind to satisfy may all prove fruitful hunting grounds. the potential for an improvement their voter bases. We have seen this in circumstances. However, as Taking a contrarian position can be lately in Italy, where the country’s anti- contrarians, we also specifically seek uncomfortable – it often takes time establishment government announced out unfashionable and unloved stocks for change to be recognised, meaning a budget that will conflict with the EU’s rules. where we believe sentiment is overly that patience is a necessity. Because pessimistic. As we know, market ours is an independent, closed-ended There’s also the question of market sentiment towards a company can fund, we have the freedom to commit cycles. The post financial crisis quickly change and that the sentiment to this long-term approach for our conditions we discussed earlier have cycle tends to swing too far, thereby investors. We’re in pursuit of the most prolonged the bull market for growth creating investment opportunities. compelling contrarian investments and stocks – we believe that a number Part of our job is to identify and those are not found in asset bubbles or of growth companies are in bubble investigate these opportunities, ‘hot trades’. Value stocks might appear territory. They’re ‘priced for perfection’ looking for tangible signs of positive out of favour now, but when the sea and even the smallest disappointment change. For example, these could change comes, these could become could lead to a share price correction. include new management, a turn in the fashionable again. Some of the internet and technology industry cycle or other factors that the stocks, characterised by the FANGs, broader market has overlooked and Please remember that past performance may fit this bill. If these companies do fall underestimated. not be repeated and is not a guide for future off their perch, value stocks may well performance. The value of shares and the benefit from a rotation of investment Our ‘belt and braces’ approach means income from them can go down as well as up. You may not get back the amount you invest. flows. Certainly, the balance between that, as well as being unloved, we like DIVIDEND REINVESTMENT UPCOMING DIVIDEND Certificated Shareholders Certificated shareholders who would like to have their dividends PAYMENT DATES automatically reinvested into further purchases of Scottish Investment Trust shares, can arrange this by joining the Dividend Reinvestment Plan. Final 2018 February 2019 Details of the Dividend Reinvestment Plan, together with an application form, can be found on our website First Interim 2019 May 2019 www.thescottish.co.uk/drip or obtained by telephoning our Registrar, Computershare Investor Services PLC, on 0370 703 0195. Second Interim 2019 August 2019 Other Shareholders If your shares are held elsewhere, such as with a broker or platform Third Interim 2019 November 2019 provider, you should refer to them for details of their dividend reinvestment facilities. You should establish the cost of any facility with your provider. Please note that the value of investments, and any income from them, can go down as well as up and you may not get back your original investment. If you are unsure of the most appropriate arrangement for your Past performance is not a guide for future performance. We do not offer circumstances, you should consult a suitably qualified financial adviser. financial advice. Investment TEAM ALASDAIR MARTIN SARAH MARK IGOR MCKINNON ROBERTSON MONACO DOBBIE MALEWICZ Manager Deputy Manager Investment Manager Investment Manager Investment Analyst WINTER 2018 ANALYSIS AND INSIGHT FROM THE SCOTTISH INVESTMENT TRUST WINTER 2018 ANALYSIS AND INSIGHT FROM THE SCOTTISH INVESTMENT TRUST A contrarian approach can pay dividends As contrarian investors, we prefer to plot our own course rather than follow Amazon are hugely in favour (though the herd. We often speak about our quest to find ‘ugly ducklings’, companies perhaps less so lately with the British Chancellor). that are shunned by others but offer a real prospect of improvement. And while the obvious upside to this approach is the potential for share For some time, we’ve been sifting price appreciation, it can also offer another valuable source of returns as through prospective investments in unfashionable companies often have higher than average dividend yields. the retail sector that meet our unloved criteria. Two such companies currently Seeing the value in ugly ducklings As long-term investors, we have time are Marks & Spencer and Macy’s, where It goes without saying that the ‘ugly on our side as we wait for a nascent we believe signs of improvement are ducklings’ we choose are unloved, but recovery to become established.