Bill Jamieson: Scottish Investment Trust sets tongues wagging

A larger-than-average £800 million-plus Edinburgh-based investment trust would be difficult to miss '“ even when performance was skulking round the industry average.

The Scottish Investment Trust is chaired by James Will. Picture: Contributed
The Scottish Investment Trust is chaired by James Will. Picture: Contributed

But when it is now up with the top three in the global trust sector with a gain of 31.5 per cent over the past 12 months – outpacing the revered Scottish Mortgage (up 16 per cent) and the recently turbo-charged Monks (up 31 per cent), little ­wonder industry tongues are wagging over the Scottish Investment Trust (SIT).

The trust struggled to get investor attention while the Baillie Gifford trusts attracted all the limelight. Beside these, SIT seemed to have little by way of distinguishing features and its mentions tended to be confined to its low-cost investor stockplan and ISA savings plans.

Sign up to our Opinion newsletter

That judgement looked glaringly unfair for a trust board featuring such long-weathered gurus as Douglas McDougall, who recently stepped down as chairman to be succeeded by James Will, industry veteran Hamish Buchan and financial market analyst and historian Russell Napier. But now the pace of ­interest has stepped up. First there has been the notable uplift in performance. This has lifted its ranking to number three in a global trust field of 24 over the last twelve months. And this has helped lift the gain over the past five years, where it is sporting a gain of 87.3 per cent, ahead of the global sector average.

Now the self-managed trust has attracted favourable attention from analysts at ­Winterflood Securities. The attention has also been picked up by Citywire Money where Gavin Lumsden has given it a “tentative plug” as a potential tip for 2017.

But there is another reason that has set the sector wires buzzing: the moves by life assurance giant Aviva to thin down its ­legacy holdings in six investment trusts. Aviva holds 12 per cent of SIT and exits earlier this year included Mercantile and Witan trusts. More recently, plans by Aviva to sell its 10 per cent shareholding prompted a strategic review at the family-run low-profile London & St Lawrence.

The Aviva exit triggered ­corporate change at the BlackRock Income Strategies Trust where Aviva holds 13 per cent. Now BlackRock has appointed Aberdeen as its new fund manager and said it would merge this trust with the group’s UK Tracker trust – a move that ­enables Aviva also to dispose of its 24 per cent holding here.

All this has left a question mark over what Aviva might do with its SIT holding. The board, suggests Winterflood, may be obliged to consider a corporate solution if Aviva is seeking an exit. That could mean a tender offer to buy out Aviva or a merger with another trust to create a “liquidity event” that gets the insurer off its books.

Adding spice to this is talk that SIT has been looking to hire a PR consultancy – not an area the diffident SIT has much cared to explore in the past. But the shares at 756.5p yield 1.7 per cent stand on a discount to net assets of 11.8 per cent. If recent improved performance can be sustained, this would by itself justify a re-rating.

Edwards the bear growls again

It’s a familiar sound for aficionados of financial sector wildlife documentaries: the spine-chilling growls of the perma-bear Albert Edwards. The investment strategist at Société Générale seems permanently stuck on an iceberg where even his distant growls can strike terror among passengers on luxury liners.

Now a series of political events has caused him to growl even louder. “Markets shrugged off the Brexit vote in a couple of days. They shrugged off Donald Trump’s election in a single day. They shrugged off the Italian referendum result in a couple of hours. Heck, in this mood they would shrug off an alien invasion!”

Now he cites one of the scariest charts he says he has seen – showing that record levels of political uncertainty could cause corporate bond spreads to go even higher than in 2008. Spreads show the difference in yield between corporate and government bonds with the same maturity, and widening credit spreads reflect concerns that corporates will struggle to service their debt.

The chart implies that given the current level of economic policy uncertainty, global spreads should be twice as wide. Edwards argues that extraordinarily high US corporate debt levels could contribute to another recession.

“It is not just the levels of political uncertainty that suggest corporate yields should be considerably above current levels”, he says. “Normally at this level of corporate debt accumulation, investors have begun throwing their toys out of the pram.”

More than toys this time around, if the ­perma-bear is right.