Standard Life UK Smaller Companies Trust, The Merchants Trust and Management Longevity

Today I received the Annual Report of Standard Life UK Smaller Companies Trust (SLS) which I have held for many years. Performance last year was disappointing – NAV total return of -1.1% but that was considerably better than their index benchmark.

I attended a presentation by The Merchants Trust (MRCH) at the ShareSoc seminar in Manchester. Merchants have a very different market focus which is on UK large cap companies predominantly. They offer a dividend yield of 5.7% which is of course much higher than SLS and higher than most other similar trusts. It’s interesting to compare their performance to SLS using AIC figures. Merchants produced a share price total return of 144.9% over ten years, while SLS produced a comparable return of 417.8% over the same period.

I know which trust I would prefer to invest in. I suspect Merchants’ problem is basically trying to buy cheap stocks on high dividend yields which I do not think is a sound investment strategy longer term even if some investors like the high dividend they can generate as a result. But what really matters is total return. Merchants probably appeals to a different type of investor than me though as it may be less volatile than a smaller companies trust.

One interesting comment in the SLS Annual Report is under a page entitled “Investment Process”. Under “qualitative factors” is says “Founders retaining positions of authority within the companies after flotation, along with longevity of tenure for CEOs are a positive signal. Four of the top ten holdings in the portfolio are still run by the company’s founder”.

That actually conflicts with what I said in my recent book “Business Perspective Investing” where I said: “Founders can remain at the helm of companies long after they should have given way to others. This is even so in public companies even if the board or shareholders have in theory the power to remove them – the fact that they still often own a large proportion of the shares and have often appointed “yes men (or women)” to the board who are unlikely to challenge them thwarts any change. One question to ask for investors is: Is a founder still in charge and does that create a risk?”. I also reported academic research that suggests that founder CEOs are the worst type.

This issue is clearly more complex than my comments have suggested and I may need to revise those in a future edition. There are examples of very successful founders but other ones of failures. Perhaps smaller companies are helped by longevity in CEOs whereas larger companies are not. I would welcome readers’ views on this subject.

But SLS clearly believes in the principle of longevity as Harry Nimmo has been the lead fund manager of the trust since 2003.

They also say “valuation is secondary” which is very much the theme of my book.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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