The Scottish Investment Trust (LON:SCIN) seeks to provide investors with capital growth and a growing income, by investing in companies around the globe that are unloved by the majority of investors. The core of its portfolio (74% at 31 October 2018) is in ‘ugly ducklings’ – stocks that are both out of favour and operationally challenged – as lead manager Alasdair McKinnon says these can generate higher than average returns over the longer term. Because of its contrarian style, SCIN has no benchmark, and generally is not exposed to ‘hot money’ investments like US and Chinese internet stocks, instead focusing on areas such as bricks-and-mortar retail (where the manager sees the perceived threat from online competition as overdone), European and Japanese banks, ‘big pharma’ (which McKinnon sees as having stronger long-term prospects than they are currently being given credit for) and gold miners. SCIN recently announced its 35th consecutive annual dividend rise and offers one of the highest yields in its peer group, at 3.2% (2.7% excluding special dividends).
Investment strategy: Investing away from the herd
Since October 2015, SCIN has followed a high-conviction, contrarian investment process, aiming to exploit opportunities in unloved companies that are overlooked as investors crowd into ‘hot’ stocks and sectors. The team invests globally, first assessing a company’s position in various cycles and then analysing business drivers, valuations, cash flows and dividends, with the aim of identifying businesses whose capacity for improvement is underappreciated. Holdings are classified under one of three headings: ‘ugly ducklings’, ‘change is afoot’ and ‘more to come’.
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