Standard Life Equity Income Trust has been run since November 2011 by Thomas Moore, a member of Standard Life Investments’ UK Equity team. It was one of our original Foundation Fundlist constituents and aims to deliver above-average income plus growth in the capital and income it produces. Mr Moore differentiates the Trust from many of its peers by including a significant number of medium-sized and smaller companies, and currently around half the Trust’s assets are invested outside the FTSE 100.
The inclusion of smaller and medium sized companies was an impediment in the second half of 2016 in the aftermath of the Brexit vote. Investors were concerned that the UK domestic economy would suffer, hitting these companies harder than larger, more internationally diverse firms. However, small and mid-cap stocks have made a comeback this year and the Trust has benefitted.
As Mr Moore explains, stock-specific factors have been in the ‘driving seat’ over the past few months rather than macro-economic forces. Results announced by many of the constituents of the portfolio, for instance Bodycote, Dunelm, Close Brothers and Galliford Try, have been highly encouraging. This has allowed share prices to shake off wider political worries. Avoiding larger companies in the pharmaceuticals and tobacco sectors has also helped relative performance.
Despite this uptick Mr Moore asserts that the valuation gap between overseas and domestic earners in the stock market remains extended – at a level close to that of the 2008-09 financial crisis – owing to the prevailing uncertain environment. He explains investors have crowded into large, defensive stocks and avoided smaller firms as well as financial and economically sensitive stocks, leaving the latter portion of the market undervalued with abundant opportunities despite many companies being on track to deliver double-digit earnings growth.
Mr Moore expects further strong performance among domestic stocks as political concerns fade. However, he also highlights that some companies should be able to provide decent returns through their own actions rather than relying on political clarity or improvements in their respective industries. Construction firm Morgan Sindall, for instance, has been through a tough time but Mr Moore believes its focus on improving profit margins will bear fruit. Meanwhile, he argues Ferguson (previously Wolseley) has its destiny in its own hands as it sells off underperforming divisions, to focus on the US. This, he suggests, will result in a stronger balance sheet and support increasing dividends.
Following a difficult period in 2016 it is pleasing to see performance has picked up and returns have been strong this year owing to the manager’s open-minded, stock picking approach – although past performance is not a guide to the future. It leads to a well-diversified equity income portfolio that includes companies with lower dividend pay outs that might grow their dividends faster than the higher yielding stalwarts more typically seen in portfolios in this area – and lead to sector-beating returns over the long term as a result.
Shares currently trade at a discount to net asset value of around 5%, offering some additional value compared with an equivalent open ended fund – Mr Moore also runs Standard Life UK Equity Income Unconstrained Fund with the same approach. The Trust’s yield is 3.8% at the time of writing, variable not guaranteed, and with the manager’s strong record of increasing pay outs the income stream from the shares could grow over time. We believe the Trust could particularly appeal to income seekers lacking exposure to stocks outside the FTSE 100 and who are comfortable with the smaller company exposure, which can be higher risk. It remains part of our Foundation Fundlist of preferred investments across the major sectors.
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