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 78.1. 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 ()23 384 879 Pascal Dowling +44 ()23 384 8869 Thomas McMahon, CFA +44 ()23 79 7. William Sobczak +44 ()23 98 6449 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
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 31.3.18 11 Standard Life Equity Income: Gearing 1..13-3.4.18 Telecommunications Cash & Other 11 Utilities Technology Basic Materials Consumer Goods 1 Oil & Gas Financials Consumer Services 1 214 21 216 217 218 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 4 21-218 3 4 3 Values 2 1 2 1-1 21 212 214 216 218 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
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 1..13-3.4.18 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. 6 4 2-2 214 21 216 217 218 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 211 212 213 214 21 216 217 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 14.99 of the company s issued 3
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 1..1-3.4.18 - -1-1 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.68. 216 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
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