Standard Life Equity Income

Transcription

1 Material produced by Kepler Trust Intelligence is a marketing communication, and is not independent research. Standard Life Equity Income Summary Standard Life Equity Income (SLET) aims to deliver an above-average income while also providing real growth in capital and income for investors. This is done through investing in a diversified portfolio, consisting mainly of quoted UK equities. Through exploiting Standard Life s vast network of connections, the team searches for companies with strong and durable cashflows that help to support the consistently growing dividends. Fund manager Thomas Moore employs an index-agnostic approach, evaluating the changing corporate environment and attempting to identify insights that are not fully recognised by the market. To achieve this, he places a great deal of emphasis on company visits. Thomas has access to the abundance of information collected by the entirety of the firm, which will meet around 3, companies in total, seeking to identify the key changes affecting each business. Currently the portfolio is comprised of 7 stocks, sitting close to the upper limit of its range of to 7 holdings. The trust s largest exposure is to small caps (c.3), which is almost 23 more than the benchmark and a key differentiator to peers. Standard Life Equity Income has outperformed the benchmark over the longer term, delivering total returns of 1,263.7 since launch in 1991, relative to the benchmark return of Thomas and his unique investment approach have also stood out in the UK equity income sector, outperforming the FTSE All Share benchmark in five out of Thomas s years at the helm. The past year has seen the discount narrow dramatically, from a discount of c.-1 in early 217, hitting a premium at times during 218, and currently trading around par. March has seen the fund perform less well in an uncertain UK political environment; however, if the negative implications of Brexit have been overstated, the trust s tilt toward smaller domestically-focused companies could provide a more positive impetus. Update 13 June 218 Analysts: William Heathcoat Amory +44 () Pascal Dowling +44 () Thomas McMahon, CFA +44 () William Sobczak +44 () Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only. This report is provided for general informa-tional purposes only. It is not an invitation or inducement to buy, sell or subscribe to any product described, nor is it a statement as to the suitability or otherwise of any investments for any person. This material does not consti-tute a financial promotion within the meaning of the FCA rules or the financial promotions order. Persons wishing to invest in any of the securities discussed herein should take their own independent advice with regard to the suitability of such investments. Portfolio The trust s objective is to deliver an above-average income, while also providing real growth in capital and income for investors, via a diversified portfolio, consisting mainly of quoted UK equities. The manager invests on an index-agnostic basis, evaluating the changing corporate environment and attempting to identify insights that are not fully recognised by the market. Additionally, he places a strong emphasis on bottom up stock selection, having kicked the tyres via face-to-face meetings. In particular, Thomas searches for companies with a strong and durable cashflow, leading to the ability to pay high, and increasing, dividends. 1

2 He takes advantage of the management house s vast network of connections, with the majority of investment ideas being generated from the 3,-plus one-to-one company meetings conducted by the team annually. Through speaking to the management of these companies, the analysts and manager are able to unearth key changes affecting businesses and develop proprietary insights. The result is a highly active portfolio, with an 88 active share. The largest sector overweight is in the financial services sector at 14.9 above the benchmark FTSE All Share. Other significant overweights include industrials and technology. Gearing Now at 14, the gearing facility has almost reached ten year highs, illustrating the manager s increased sentiment toward the UK market. Last year, being geared during the periods of rising markets had a positive effect of 1.2 on the results. The manager has been set parameters of between net cash and 1 net gearing, with the company maintaining a flexible 3m bank facility. Fig.3: Gearing Fig.1: Asset Allocation Standard Life Equity Income: Sector exposure As at Standard Life Equity Income: Gearing Telecommunications Cash & Other 11 Utilities Technology Basic Materials Consumer Goods 1 Oil & Gas Financials Consumer Services Industrials The portfolio is currently comprised of 7 stocks, towards the top of its usual range of to 7. Within this, the portfolio is not particularly concentrated, with the top ten holdings making up less than 3. A key differentiator of the portfolio is in the market capitalisation allocations. As the graph below shows, the trust s largest exposure is to the small caps (c.3), almost 23 more than the benchmark. In comparison, the largest stocks - which account for 18 of Standard Life Equity Income - make up more than half of the benchmark s assets. Fig.2: Market Cap Exposure Returns Standard Life Equity Income has a long-term track record of outperforming the benchmark, delivering total returns of 1,263.7 since its inception in 1991, relative to the benchmark return of 78.1 over the same period. This performance has continued under Thomas Moore, who has outperformed the FTSE All Share benchmark in five of his seven years at the helm. Fig.4: Returns Standard Life Equity Income Standard Life Equity Income: Performance vs indicies Standard Life Equity Income: Market Cap Exposure Values Giant Large Medium Small Micro Standard Life Equity Income FTSE AllShare Standard Life Equity Income (NAV) FTSE AllShare IA OE Global Equity Income Morningstar IT Global Equity Income 2

3 The portfolio has a bias towards mid caps and UK domestic stocks, which meant it was hit hard in the build-up and aftermath of the EU referendum in 216, which resulted in the Brexit vote. However, last year saw a much better performance. Standard Life Equity Income almost doubled the returns of both its peers and the index over 217. Recent months have seen the fund underperform the benchmark in an uncertain UK political environment; however, if the negative implications of Brexit have been overstated, the trust s tilt toward smaller domesticallyfocused companies could provide a positive impetus. Fig.: Performance 8 Standard Life Equity Income: Performance vs indicies revenue reserves. The trust itself has a decent long-term track record of dividend growth though, before Thomas became manager, it was becoming unsustainable and he admits that he had to sacrifice a degree of income and yield during the early part of his tenure in 211. Standard Life Equity Income pays dividends out quarterly in March, June, September and January. In FY17 the board had stated its intention to distribute more income to shareholders, thanks to its confidence in the underlying rate of dividend growth and the current revenue reserves. This meant that the total 217 dividend equated to 17.1p, an 11 increase on the previous year. This dividend was 1.1x covered by earnings, and the board has now amassed a revenue reserve cover of.83x (compared to an average the.92x across the sector). Putting this into perspective, the revenue reserve cover was.6x when Thomas took charge Again, the board has announced that the total dividend will increase, stating that the FY18 payments will be spread more evenly and will be at least higher than the FY17 distribution. This increase will represent the 18th consecutive year of dividend growth and an annualised dividend growth over five years of 6.9, compared to 4.1 across the peer group (Source: Cazenove). Standard Life Equity Income (NAV) Morningstar IT UK Equity Income (NAV) Dividend FTSE AllShare (NAV) IA OE UK Equity Income (NAV) The trust has a strong income profile, which has been carefully managed since Thomas took over. Dividend growth is clearly fundamental to the investment process, but Thomas admits that he and the board have had to be patient over recent years, as he rotated the portfolio to its current unconstrained form and built up the once depleted Fig.6: Dividends 2 1 Standard Life Equity Income: Dividend Growth Management Manager Thomas Moore joined Standard Life in 22 and has managed the open-ended Standard Life UK Equity Income Unconstrained fund since 29, taking control of the investment trust in 211. He works as part of a collegiate team of 12 fund managers in the FTSE 3 group, all of whom have an area of expertise for which they are responsible as analysts in their own right his is financial services. The fund managers are supported by a sizeable team of analysts. Aside from adding to the resources at Thomas s disposal, we see no reason why the merger between Aberdeen and Standard Life last year should affect the day-to-day running of the trust. Nevertheless, the board has notified shareholders it will continue to pay close attention to developments and the implications [the merger] may have for the management [of the trust]. (p) 1 Discount Standard Life Equity Income The past year has seen the discount narrow dramatically, from a discount of c.-1 in early 217, hitting a premium at times during 218, and currently trading at par. This is above the average for the past five years (-2.6). At the most recent AGM (December 217), the board was authorised to buy back up of the company s issued 3

4 ordinary share capital (excluding shares held in treasury). However, because the trust has been trading consistently at levels the board is satisfied with, no shares have been bought back since February 217. Fig.7: Discount Standard Life Equity Income: Discount / Premium Jul '1 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Charges Currently, the ongoing charge for the trust is.87, above the AIC sector average of was the last time that the fee was amended and it currently stands at.6 for the first 2m of assets, and all assets above 2m are charged a fee of.. Within this, Standard Life Equity Income allocates 3 to revenue and 7 to capital. 4

5 Important Information Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only, and is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. This report has been issued by Kepler Partners LLP solely for information purposes only and the views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions. The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this website is exclusively for non-us Persons. The information in this website is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons. This is a marketing document, should be considered non-independent research and is subject to the rules in COBS 12.3 relating to such research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice. This is not an official confirmation of terms and is not to be taken as advice to take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm s internal rules. A copy of the firm s conflict of interest policy is available on request. Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction. PLEASE SEE ALSO OUR TERMS AND CONDITIONS Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/1 Savile Row, London W1S 3PF with registered number OC Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.