At a time when much of the asset management industry is looking to consolidation and outsourcing to improve performance and reduce costs, a self-managed independent investment trust is going against the flow.
Alasdair McKinnon, who manages the small in-house team at Scottish Investment Trust from its base in Edinburgh city centre, practices what he describes as a “contrarian” philosophy. Essentially, that involves buying companies in ugly duckling territory and selling them when they become swans. According to Mr McKinnon: “That sounds easy, but it isn’t. When somebody says ‘black’, then we say, ‘OK, but let’s examine the paintwork underneath as it might be white.’ ”
Along with the ugly ducklings, the FTSE 250 constituent holds two other categories of companies: those where “change is afoot” are thought of as being over the worst of their trouble but are still unappreciated by the wider market; and the “more to come” class is for businesses that are doing well but which the trust believes can go further.
There is evidence that the approach is paying off. Last year the Scottish Investment Trust was in the first quartile of its Association of Investment Companies peer group. Management charges, equivalent to 0.49 per cent of fees, look competitive in a sector where there is downward pressure on costs.
Under Mr McKinnon, who was installed in 2014, the portfolio has been cut back from more than 100 to around half that. Its biggest holding is in Treasury Wine Estates, the Australian drinks company that it bought into in 2015. Mr McKinnon points to the cyclical nature of the wine market, a strong management team and the opportunities for wine in emerging markets as among the reasons the trust remains keen on the stock.
Getting out at where the trust thinks is the top can be seen in its approach to Nintendo, which has been reinvigorated by sales of its Switch games console. Mr McKinnon, who pre-ordered one of the machines to test it out, said: “After the Wii and 3DS, kids started using iPads and mobile things to play games and people said that no one is going to need Nintendo [consoles] again. We looked at it and said this is a really good company with wonderful intellectual property and net cash. Switch, which no-one had high hopes for, has been an absolute rocket star. Now that console has to continue to do well [to sustain performance], so we have been selling.”
Domestically Mr McKinnon is keen on the potential of the turnaround stories at Tesco and Marks and Spencer, both of which are in the trust’s top ten holdings: “People have written them off. People fell in love with the internet again and are saying anyone selling things from a shop is dead. We agree there are issues for the traditional retailer, but nobody makes money from internet [delivery]. A shop is a very efficient way to deliver goods, while a delivery to every door isn’t.”
The trust, founded in 1887 and with net assets of more than £850 million (and which boasts 33 years of unbroken rises in its ordinary dividend), has also been quite bullish on oil stocks during the price downturn of recent years and continues to be so.
Mr McKinnon said that cost-cutting in the sector, along with a growing global demand for oil, continue to make it an attractive investment. “You don’t have to second guess the oil price. The balance sheets of the majors are strong and they are going to pay dividends.”
My advice Buy
Why With dividend cover in place for at least the next four years, an increasing payment is almost guaranteed
Flow Group
There has been proliferation of small, cheap new suppliers in the energy market over the past few years, with more than 50 now in operation, yet many have yet even to file a full set of accounts (Emily Gosden writes).
Flow Energy is an exception, thanks to owner Flowgroup’s listing on Aim. It is in focus after hiring Alan Lovell, a former chief executive of Infinis, Costain and Jarvis, as its new chairman last week.
Flowgroup has an unusual history: it started off developing micro-CHP boilers and launched Flow Energy, its supply business, only in 2013. A string of regulatory changes ruined the prospects for the boiler unit in Britain and forced a rethink.
Intially the group put Flow Energy up for sale, while warning of competition from cut-price rivals, but, after failing to strike a deal, it instead raised £25 million this summer and renewed efforts to expand the supplier.
Its strategy is to stop trying to compete with the cheapest suppliers for savvy customers via switching sites and instead target disengaged customers via call centres in South Africa. Flow Energy has more than 250,000 accounts, little changed from a year ago, is loss-making and on present trends needs to double its customer base to get the economies of scale to cover its administrative costs and turn a profit. It is aiming to do so in the fourth quarter of next year.
There are two notable factors in its favour: a good customer service record; and a wholesale energy contract with Shell, which helps to protect it from price spikes.
However, 500,000 remains a very steep target for a company that has managed only muted growth so far this year. With a price cap looming and renewed regulatory efforts to help disengaged customers, this is an unpredictable market. Mr Lovell is known as a turnaround specialist and will hope to repeat some past successes, but he also has been a director of three businesses that went into receivership.
Flowgroup shares may be very cheap, but they are also very risky. For those seeking a reliable investment in the energy market, spending time switching their own supplier looks like a much safer bet.
My advice Avoid
Why Risks too high in challenging market
