Comment: Sleit with a striking outperformance

It IS a widespread misconception that all income-orientated investment trusts are much the same and that they are broadly similar in performance. So it is a pleasure to report on a trust that has not only developed a distinct persona but is also building a creditable record for outperformance, almost completely avoiding the turbulent downturn this year.

Bill Jamieson. Picture: Jayne Emsley

Step forward Standard Life Equity Income Trust (Sleit), managed by Thomas Moore. It held a presentation in Edinburgh last week and it can fairly be said that this £191 million trust – relatively small given the prominence of its stable and performance record – has much to present for institutional and retail investors.

The outperformance is now striking. Over the past 12 months Sleit has been the top performer in its sector, beating the other 33 investment trusts in the equity income space with a share price gain of 17.3 per cent against an average of 0.1 per cent for global income trusts. Given the sharp falls in global markets overall in recent months, that is a striking achievement.

Over three years Sleit has come third with a gain of 85.4 per cent (global equity income average 35.5 per cent) and over five years it has come fifth with a share price rise of 98.1 per cent (sector average 52.6 per cent).

So much for the capital performance. What of income? Sleit has consistently raised the dividend payout each year since launch, from 3.4p per share in 1992 to 14p last year, a rise of 306 per cent, markedly outperforming the Retail and Consumer Price Indices. But arguably more impressive is what it has not paid out: the trust’s revenue reserves have risen from £3.2 million in 2005 to £5.7m last vear. How has this capital and income performance been achieved? At first glance, the top ten holdings looks similar to that in other income orientated funds – BT Group, DS Smith, Aviva, Vodafone, Legal & General, Close Brothers and the Prudential.

But it is what is not in this list that is most striking. There are no holdings in Big Oil – BP and Royal Dutch Shell for example – which figure prominently in most income trusts. There are no mining or commodity shares. There are no tobacco shares. And absent are those big holdings in pharmaceutical giants such as GlaxoSmithKline and AstraZeneca. Look in vain for banks and utilities. Yet these are the sectors that have traditionally dominated trusts of this type.

What the managers have done is to look hard at the dividend sustainability of those higher-yielding FTSE100 companies – and found a disconcerting vulnerability in many cases. This caution has flowed from concerns that many of these large companies are over-priced. And an astute investment manager should be looking to buy and hold shares that are not so vulnerable to the type of correction we have witnessed in recent months.

This is what Sleit has done. And its success has flowed from a fine-toth comb investment process. Moore has also kept a wary eye on dividend concentration, apprehensive that many income trusts have become overly dependent on a few big dividend payers to maintain yields.

For example, dividend concentration as measured by the proportion of income flowing from the top ten holdings in the trust has declined from 50.3 per cent in 2011 to 28.3 per cent.

Sleit has thus cast its net wider for income, with a higher proportion of holdings in the FTSE250 and Small Cap sectors. Here again, there is a misconception that the behemoths of the FTSE 100 offer a better prospect of dividend growth. Yet in the 29 years to June 2015, the compound average annual dividend growth was 4.6 per cent. The comparable figure for the FTSE 250 is 6.7 per cent.

Sleit’s approach is not without risk. And the risk at present is that sectors Moore has avoided will quickly snap back. It is not inconceivable that over the next 12 months we might see a sharp rally in the oil and gas sector; that some banks such as HSBC and Standard Chartered will see a recovery, and that other currently vulnerable sectors will rapidly recover once they have bottomed out.

The difficulty is that companies that have experienced a dividend cut do not quickly return to favour as other problems emerge. And Sleit currently prefers to be a little late here than a little early.

Meanwhile investors in the trust can take comfort in a performance that has placed this trust firmly in the top quartile – and with impressive reserves to cushion future turbulence. The shares, at 459p, are at a slight 1.97 per cent premium to net assets with a yield of 2.88 per cent. Sleit well deserves a place in an ISA portfolio.