Standard Life Equity Income Trust — Unconstrained approach to UK equity investing

Aberdeen Standard Equity Income Trust (ASEI)

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−0.50 (−0.14%)

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Standard Life Equity Income Trust — Unconstrained approach to UK equity investing

Standard Life Equity Income Trust (SLET) has been managed by Thomas Moore since 2011. He aims to generate above-average income and real capital and income growth from a portfolio of UK equities, which is invested across the market cap spectrum. Following an index-agnostic approach, the manager has restructured SLET’s income stream over the past few years and shareholders are now enjoying a higher distribution, with less revenue going into reserves. The board has recently announced a higher than previously forecast final dividend for FY17 and says the annual dividend in FY18 will be at least 5% higher than the FY17 distribution. SLET’s current dividend yield is 3.5%.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

Standard Life Equity Income Trust

Unconstrained approach to UK equity investing

Investment trusts

17 January 2018

Price

487.5p

Market cap

£240m

AUM

£272m

NAV*

500.8p

Discount to NAV

2.6%

NAV**

506.2p

Discount to NAV

3.7%

*Excluding income. **Including income. As at 15 January 2018.

Yield

3.5%

Ordinary shares in issue

49.2m

Code

SLET

Primary exchange

LSE

AIC sector

UK Equity Income

Benchmark

FTSE All-Share

Share price/discount performance

Three-year performance vs index

52-week high/low

500.0p

393.5p

509.1p

430.4p

**Including income.

Gearing

Gross*

12.0%

Net*

12.0%

*As at 30 November 2017.

Analysts

Mel Jenner

+44 (0)20 3077 5720

Sarah Godfrey

+44 (0)20 3681 2519

Standard Life Equity Income Trust is a research client of Edison Investment Research Limited

Standard Life Equity Income Trust (SLET) has been managed by Thomas Moore since 2011. He aims to generate above-average income and real capital and income growth from a portfolio of UK equities, which is invested across the market cap spectrum. Following an index-agnostic approach, the manager has restructured SLET’s income stream over the past few years and shareholders are now enjoying a higher distribution, with less revenue going into reserves. The board has recently announced a higher than previously forecast final dividend for FY17 and says the annual dividend in FY18 will be at least 5% higher than the FY17 distribution. SLET’s current dividend yield is 3.5%.

12 months ending

Share price
(%)

NAV
(%)

FTSE All-Share
(%)

FTSE 100
(%)

FTSE 250
(%)

31/12/13

33.1

32.8

20.8

18.7

32.3

31/12/14

5.1

5.2

1.2

0.7

3.7

31/12/15

15.5

13.3

1.0

(1.3)

11.2

31/12/16

(10.9)

(3.3)

16.8

19.1

6.7

31/12/17

23.8

20.8

13.1

11.9

17.8

Source: Thomson Datastream. Note: All % on a total return basis in GBP.

Investment strategy: Benchmark-agnostic approach

Moore adopts Standard Life Investments’ (SLI) ‘Focus on Change’ philosophy, seeking companies with strong cash flow (hence an ability to pay high and/or growing dividends) that are trading at reasonable valuations. He invests across the market cap spectrum; at end-November 2017, more than 60% of the portfolio was invested outside of the large-cap FTSE 100 companies (Exhibit 1). The index-agnostic approach means that stock and sector weightings can vary meaningfully from the benchmark FTSE All-Share Index; the current largest overweight sector is financials, which comprises c 45% of the portfolio (c 1.7x the index weighting), and the trust retains a zero weighting in healthcare (c 8% of the index). Net gearing of up to 25% is permitted; at end-November 2017, it was 12.0%.

Market outlook: Small-caps more attractively valued

Over the last five years, smaller-cap stocks have outpaced the total returns of the FTSE 100 Index. However, on a P/E multiple basis smaller-cap stocks remain more attractively valued, despite forecast faster earnings and dividend growth than large-cap companies and better dividend cover. Investors seeking UK equity exposure may be attracted to a fund that invests across the market cap spectrum, seeking companies with above-average income and growth potential.

Valuation: Discount in a narrowing trend

SLET’s current 3.7% share price discount to cum-income NAV is close to the low end of the 1.8% to 10.8% range over the past 12 months. It compares with the averages of the last one, three, five and 10 years (range of 2.7% to 5.5%). The discount has been in a narrowing range since March 2017. SLET’s FY17 dividend is 11.0% higher than in FY16 and represents the 17th consecutive year of increased annual distributions; its current dividend yield is 3.5%.

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

Standard Life Equity Income Trust (SLET) aims to provide shareholders with an above-average income from their equity investment while also providing real growth in capital and income. It seeks to achieve this through a diversified portfolio of between 50 and 70 equity holdings. The benchmark is the FTSE All-Share Index.

5 December 2017: Final results for 12 months ending 30 September 2017. NAV TR +14.7% versus benchmark TR +11.9%. Share price TR +15.9%. Announcement of a final dividend of 5.5p.

1 September 2017: Announcement of a third interim dividend of 4.0p.

24 May 2017: Interim results for six months ending 30 March 2017. NAV TR +7.2% versus benchmark TR +8.1%. Share price TR +2.5%. Announcement of a second interim dividend of 3.8p.

Forthcoming

Capital structure

Fund details

AGM

January 2018

Ongoing charges

0.87% (FY17)

Group

Aberdeen Standard Investments

Interim results

May 2018

Net gearing

12.0%

Manager

Thomas Moore

Year end

30 September

Annual mgmt fee

0.65% to £250m, then 0.55%

Address

1 George Street,
Edinburgh, EH2 2LL

Dividend paid

Quarterly

Performance fee

None

Launch date

14 November 1991

Trust life

Indefinite

Phone

+44 (0)345 600 2268

Continuation vote

Five-yearly, next 2021

Loan facilities

£30m with Scotiabank

Website

www.standardlifeinvestments.com

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

Dividends are paid quarterly in March, June, September and January. It is the board’s intention that SLET should achieve long-term real (ie above inflation) growth in its dividend.

SLET may buy back up to 14.99% or allot up to 10% of ordinary shares annually to manage a discount or a premium. Figures include shares issued as a result of subscription share exercise.

Shareholder base (as at 6 November 2017)

Portfolio exposure by market cap (as at 30 November 2017)

Top 10 holdings (as at 30 November 2017)

Portfolio weight %

Company

Sector

30 November 2017

30 November 2016

Aviva

Life insurance

2.9

3.4

Royal Dutch Shell

Oil & gas producers

2.9

N/A

Prudential

Life insurance

2.9

2.3

Sage

Software & computer services

2.8

3.4

BP

Oil & gas producers

2.7

N/A

Micro Focus

Software & computer services

2.7

2.7

River and Mercantile

Financial services

2.6

N/A

Close Brothers

Banks

2.6

2.4

Rio Tinto

Mining

2.5

3.9

HSBC

Banks

2.5

N/A

Top 10

27.1

29.6

Source: Standard Life Equity Income Trust, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in November 2016 top 10.

Market outlook: Smaller-caps retain lower P/E ratings

The total return of UK indices over the past five years is shown in Exhibit 2 (left-hand side). The FTSE SmallCap, FTSE 250 and FTSE AIM 100 indices have all outpaced the performance of the large-cap FTSE 100 Index. UK equities have performed particularly strongly since mid-2016 as economic data have been better than many would have expected following the result of the UK’s European referendum. As shown in Exhibit 2 (right-hand side), on a P/E basis, the valuation of large-cap companies remains less attractive than the valuation of smaller-cap companies. While large-cap companies have a competitive dividend yield, data from SLI suggest that smaller companies with the potential to generate sustained growth are able to grow their dividends at a faster pace than large-cap companies, and also have better dividend cover. Investors seeking income from UK equities may wish to consider a fund that invests across the market-cap spectrum and has generated consistent outperformance versus its benchmark.

Exhibit 2: Market performance and valuation

UK indices over five years (total return)

Valuation metrics of UK indices (as at 16 January 2018)

 

P/E*
(x)

P/B
(x)

EV/sales
(x)

ROE
(%)

Div yield
(%)

FTSE All-Share

20.3

2.0

1.5

9.4

3.8

FTSE 350

20.5

2.0

1.6

9.6

3.8

FTSE 100

20.9

2.0

1.5

9.5

4.0

FTSE 250

17.9

2.2

1.7

10.2

2.7

FTSE SmallCap

17.7

1.6

1.1

2.0

4.2

Source: Thomson Datastream, Edison Investment Research, Bloomberg. Note: *P/E is current, based on cash earnings.

Fund profile: Unconstrained by the benchmark

SLET was launched in 1991 and has been managed by SLI since November 2005. The lead manager since May 2012 has been Thomas Moore (having been co-manager since November 2011). He aims to generate an above-average level of income along with real growth in capital and income. The manager is unconstrained by the stock and sector weightings in the benchmark FTSE All-Share Index, and the portfolio is typically made up of between 50 and 70 stocks. Turnover is generally between 20% and 35% pa. As shown in Exhibit 1, more than 60% of the portfolio is held in mid- and small-cap stocks, which is a much higher weighting than the benchmark (c 20%). At the time of investment, a maximum of 10% of net assets may be in a single stock and the top 10 positions will not make up more than 50% of the portfolio. The board has delegated gearing responsibility to the manager, within a range of 5% net cash to 15% net gearing. At end-November 2017, net gearing was 12.0%; modestly higher than the c 10% historical average.

The fund manager: Thomas Moore

The manager’s view: Benefits of index-agnostic approach

Moore highlights the benefits of investing across the market cap spectrum, seeking companies with sustainable dividends and long-term capital growth. He notes the high level of dividend concentration in the FTSE All-Share Index, where in 2016 the largest 10 dividend-paying companies contributed more than 50% of total index income. The investments that the manager makes in mega-cap companies are for stock-specific reasons. Examples include BP and Royal Dutch Shell, which have lowered their breakeven costs of production leading to better dividend cover, and HSBC, which has undergone a period of major restructuring aiming to generate higher revenue and earnings growth.

The manager has confidence in the underlying cash flow generation of companies in SLET’s portfolio, which should lead to robust dividend growth for the trust. He is also able to find companies whose cash flow generation he believes is underappreciated, offering the potential for a positive share price revaluation. Moore views the current investment backdrop as more benign than in 2016, which was affected by the UK’s European referendum, and believes that the second stage of the Brexit negotiations could herald a better UK political environment. In aggregate, SLET’s portfolio companies generate c 55% of their revenue in the UK. While this is roughly double the UK revenue exposure within the benchmark, it is in line with the trust’s historical exposure. The manager has no difficulty in finding high-conviction UK domestic investments, with the ratings gap between UK domestic stocks and the broader market (FTSE 350) remaining the largest since 2008. Moore believes that UK inflation has likely peaked around 3% and that the real wage gap will close, which will benefit domestic UK companies through higher consumption. He notes that the level of employment is high and asset prices have risen, helping to ensure that debt service costs are manageable. Moore believes that if the UK consumer was struggling, evidence would have emerged in 2017.

Asset allocation

Investment process: SLI’s ‘Focus on Change’ philosophy

Moore and SLI’s UK Equity team follow the company’s ‘Focus on Change’ philosophy, believing that at different times of the economic cycle there are different factors that drive stocks and markets. The thesis is that over the long term, stock prices are driven by company fundamentals, but over shorter time periods, share price moves can be less rational. The broad investment universe of c 1,500 stocks is screened using SLI’s proprietary stock-screening matrix; factors include share price momentum, earnings growth and revisions, valuation and dividend yield. Potential investee companies are analysed with the following questions in mind: what are the key drivers and issues for the stock; what is changing; what is assumed in the price; what will make the market change its mind about the stock; and what specific triggers are there? An assessment of a company’s corporate governance track record is also an important consideration. SLET’s resulting portfolio comprises 50-70 holdings and position sizes are determined by the manager’s level of conviction. Because Moore follows an index-agnostic approach, stock and sector weightings can vary significantly versus the benchmark. Risk is monitored using SLI’s sophisticated risk modelling system, which includes pre-trade analysis.

Current portfolio positioning

In terms of sector exposure, over the past 12 months the largest increases are financials (+9.4pp) and oil and gas, which has gone from a zero weighting to 7.1% of the portfolio. SLET’s energy exposure is unlikely to increase meaningfully as moving down the market-cap spectrum below the mega-caps is a long list of exploration and production companies, which the manager says have unattractive cash flow characteristics. The largest decreases in sector exposure are consumer services (-7.3pp) and telecoms (-6.1pp). SLET continues to have no exposure to the healthcare sector, as the manager considers that industry fundamentals are unappealing, which will limit the ability for healthcare companies to pay dividends over the medium term. Another notable feature of SLET is its c 45% weighting in financial companies; the manager explains that exposure is diversified, including holdings in life insurers such as Aviva and Prudential, non-life insurers such as Beazley and Direct Line Insurance, and asset managers such as Ashmore and Premier Asset Management, as well as banks such as Close Brothers and HSBC.

Exhibit 3: Portfolio sector exposure vs benchmark (% unless stated)

Portfolio end- November 2017

Portfolio end- November 2016

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

Financials

45.1

35.7

9.4

26.7

18.3

1.7

Industrials

16.4

15.4

1.0

11.1

5.3

1.5

Consumer services

10.0

17.3

(7.3)

11.1

(1.1)

0.9

Oil & gas

7.1

0.0

7.1

12.7

(5.6)

0.6

Consumer goods

6.0

9.1

(3.1)

15.6

(9.6)

0.4

Technology

5.5

6.3

(0.8)

1.2

4.3

4.5

Basic materials

5.3

4.9

0.4

7.2

(1.9)

0.7

Telecommunications

2.6

8.7

(6.1)

3.6

(1.0)

0.7

Utilities

2.1

2.6

(0.5)

2.8

(0.7)

0.7

Healthcare

0.0

0.0

0.0

8.0

(8.0)

0.0

100.0

100.0

100.0

Source: Standard Life Equity Income Trust, Edison Investment Research. Note: Adjusted for cash and gearing.

Comparing sector weightings to when we last published a note on SLET in August 2017, there is less consumer exposure. The manager took some profits ahead of the snap UK general election in June 2017. These include auto retailer Inchcape, housebuilder Persimmon and replacement window and door manufacturer Safestyle UK. Inchcape has both UK and overseas exposure; the manager had concerns about the domestic market. Persimmon had delivered very strong returns, but Moore says that the company is experiencing rising costs and that a director had been selling some Persimmon shares. Safestyle UK was a top 10 holding; however, business conditions have deteriorated and the company has issued a series of profit warnings.

Moore has recently initiated a position in British American Tobacco (BAT), which he was able to buy during a period of share price weakness due to potential news on nicotine regulation by the US Food and Drug Administration. BAT is one of the leading global tobacco companies with significant exposure to emerging markets. There is potential for the company’s novel nicotine products to drive higher revenue growth, and its shares are currently yielding c 3.5%.

Performance: Solid outperformance versus benchmark

Exhibit 4: Investment trust performance to 31 December 2017.

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Thomson Datastream, Edison Investment Research. Note: Three, five and since inception performance figures annualised. Since inception (SI) refers to tenure of Thomas Moore, appointed as sole manager on 14 May 2012.

Absolute returns are shown in Exhibit 4. Over the past 12 months, SLET’s NAV and share price total returns of 20.8% and 23.8%, respectively, are meaningfully ahead of the benchmark’s 13.1% total return. Significant contributors to performance include holdings in asset managers River and Mercantile and Premier Asset Management, which have benefited from positive fund flows and revenue growth, and not holding pharmaceutical companies Shire and GlaxoSmithKline. Exhibit 5 shows SLET’s relative returns. The trust’s NAV has outperformed the FTSE All-Share Index benchmark over almost all periods shown, despite a marked period of underperformance in mid-2016 due to the outperformance of large-cap companies with overseas earnings. SLET is structurally short US dollar exposure and long sterling; as a result, the manager says that fund performance is a challenge when sterling is weak. The manager is encouraged that investment sentiment has changed, and says that there is now more of a focus on company fundamentals, rather than on the macro environment, which has dominated the past 18 months. He notes that companies posting strong results are enjoying a positive rerating, and in aggregate, smaller-cap companies are now outperforming the largest UK companies.

Exhibit 5: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

SI

Price relative to FTSE All-Share

(1.5)

(0.7)

3.2

9.5

(4.4)

9.4

18.3

NAV relative to FTSE All-Share

0.4

1.4

3.1

6.8

(0.8)

13.3

19.9

Price relative to FTSE 100

(1.8)

(0.8)

3.4

10.6

(3.1)

13.4

23.6

NAV relative to FTSE 100

0.2

1.3

3.3

7.9

0.5

17.5

25.3

Price relative to FTSE 250

(0.8)

(0.6)

1.9

5.1

(8.7)

(6.9)

(4.0)

NAV relative to FTSE 250

1.2

1.5

1.8

2.5

(5.3)

(3.5)

(2.7)

Source: Thomson Datastream, Edison Investment Research. Note: Data to end-December 2017. Geometric calculation.

Exhibit 6: NAV total return performance relative to benchmark over three years

Source: Thomson Datastream, Edison Investment Research

Discount: Narrowing trend since early 2017

Exhibit 7: Share price premium/discount to NAV (including income) over three years (%)

Source: Thomson Datastream, Edison Investment Research

Looking at SLET’s discount over the last three years (Exhibit 7), the widest discount of 11.3% occurred on 3 November 2016, a period characterised by heightened investor risk aversion ahead of the US presidential election. Since March 2017, SLET’s share price discount to cum-income NAV has been on a narrowing trend. The current 3.7% discount is towards the low end of the 1.8% to 10.8% range of the past 12 months. It compares to the averages of the past one, three, five and 10 years of 5.5%, 3.8%, 2.7% and 4.1%, respectively.

Capital structure and fees

Following the final conversion of SLET’s subscription shares in December 2016, which increased the share count by 8.6%, SLET has a single class of share; there are 49.2m ordinary shares in issue. The trust has a £30m bank lending facility with Scotiabank; the current cost of debt is c 1.3%. At end-November 2017, SLET’s net gearing was 12.0%. The manager says that he is comfortable with the trust’s level of gearing given the opportunities he sees to buy high-growth dividend companies at reasonable valuations. However, he has active discussions with the board about the level of gearing. Having been geared during a Brexit-induced market sell-off, Moore manages the level of gearing more actively; for instance he lowered the level of gearing ahead of the snap UK general election. This proved to be a correct decision and provided the manager with some dry powder to invest in companies that became oversold following the election result.

Standard Life Investments receives an annual management fee, which is charged 30% to revenue and 70% to capital, representing the board’s expectation of the split of returns over the long term between income and capital, respectively. The fee is calculated as 0.65% on the first £250m and 0.55% on total assets above £250m (prior to October 2016 it was 0.65% of total assets). FY17’s ongoing charges of 0.87% were 9bp lower than in FY16.

Dividend policy and record

SLET pays quarterly dividends in March, June, September and January. In FY17, the annual dividend of 17.1p was 11.0% higher than the 15.4p dividend paid in FY16 and represents the 17th consecutive year of dividend increases. The FY17 distribution includes a final indicated dividend of 5.5p, which was revised up from an initial indication of 5.2p; the total dividend was 1.12x covered by income. SLET continues to benefit from both ordinary dividend receipts and special dividends. Over the past five years, its annual dividend has compounded at an annual rate of 6.0%, which is well above the rate of UK inflation over the period. The board has announced that the FY18 total dividend will be at least 5% higher than the FY17 distribution, and payments will be spread more evenly. The intention is that the first three interim dividends will be equal, with the final dividend dependent on the level of income. SLET’s current dividend yield is 3.5%.

Peer group comparison

SLET is a member of the AIC UK Equity Income sector, which is made up of 24 trusts. Exhibit 8 compares the 15 largest; each has a market cap in excess of £200m. SLET’s NAV total return ranks first over one year (6.4pp above average). It is broadly in line with the average over three years despite a meaningful period of underperformance following the result of the UK’s European referendum, and SLET is above average over both five and 10 years, ranking fifth out of 15 funds and sixth out of 14 funds, respectively. The trust has a smaller-than-average discount and it has an above-average ongoing charge, although no performance fee is payable. SLET’s gearing is higher than average, while its dividend yield is in line with the selected peer group average.

Exhibit 8: Selected peer group as at 16 January 2018*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (ex-par)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield (%)

Standard Life Equity Income

239.7

18.9

35.6

80.5

139.0

(2.5)

0.9

No

112

3.5

City of London

1,525.7

10.9

31.8

68.4

125.6

1.1

0.4

No

108

3.9

Diverse Income Trust

395.0

16.9

44.2

105.8

0.1

1.2

No

100

3.1

Dunedin Income Growth

397.7

9.9

26.7

51.4

87.3

(10.1)

0.7

No

113

3.9

Edinburgh Investment

1,381.4

6.5

29.4

82.0

139.0

(8.1)

0.6

No

109

3.7

F&C Capital & Income

332.3

17.6

49.9

72.2

104.8

2.1

0.6

No

104

3.2

Finsbury Growth & Income

1,238.8

16.9

48.3

109.5

269.8

0.1

0.7

No

102

1.9

JPMorgan Claverhouse

404.8

14.4

40.2

80.8

121.2

(5.3)

0.8

No

113

3.3

Lowland

426.2

15.7

41.0

77.7

166.4

(5.9)

0.6

Yes

111

3.4

Merchants Trust

554.5

13.2

33.0

59.3

89.6

(7.5)

0.6

No

105

4.8

Murray Income Trust

544.2

11.3

31.4

57.9

101.1

(6.7)

0.7

No

103

4.0

Perpetual Income & Growth

924.5

7.4

19.4

72.7

139.3

(8.3)

0.7

No

106

3.6

Schroder Income Growth

205.0

10.7

36.0

77.5

141.0

(7.9)

1.0

No

100

3.2

Temple Bar

890.7

8.9

33.7

63.8

170.4

(4.9)

0.5

No

96

3.1

Troy Income & Growth

230.4

7.7

31.6

68.3

53.2

0.6

0.9

No

100

3.3

Average

646.1

12.5

35.5

75.2

132.0

(4.2)

0.7

105

3.5

SLET rank (out of 15 funds)

13

1

7

5

6

6

4

3

7

Source: Morningstar, Edison Investment Research. Note: *Performance as at 15 January 2018. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

The board

There are five directors on the board of SLET; all are non-executive and independent of the manager. Chairman Richard Burns was appointed as a director in 2006 and assumed his current role in December 2014. The senior independent director is Jeremy Tigue; he joined the board in 2014 and assumed his current role in December 2015. Josephine Dixon was appointed in 2011 and Mark White in 2013. The newest member of the board is Caroline Hitch; she was appointed in January 2017 following the retirement of Keith Percy. Hitch has more than 30 years’ investment management experience, most recently with HSBC, and has been a non-executive director of Schroder Asian Total Return Investment Company since February 2015.

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Standard Life Equity Income Trust and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority (Financial Conduct Authority). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Standard Life Equity Income Trust and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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DEMIRE — Strategic programme delivering gains

The first nine months of FY17 showed good operational development as well as significant progress with the strategic programme (DEMIRE 2.0) that targets efficiency gains and portfolio growth. Management has raised FY17 guidance to reflect tax optimisation measures as well as operational performance. FY18 will benefit from significant interest cost savings following recent refinancing. Management targets further efficiencies and simplification of the group structure and is seeking opportunities for portfolio growth with the potential for scale economies. With funds from operations (FFO) earnings rising strongly, we would expect DEMIRE to consider dividend distributions (not in our forecasts), a potential trigger for closing the 17% discount to EPRA NAV.

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