Securities Trust of Scotland — New manager driving improved performance

Securities Trust of Scotland (LN: STS)

Last close As at 18/05/2024

221.00

−2.00 (−0.90%)

Market capitalisation

222m

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Securities Trust of Scotland — New manager driving improved performance

Securities Trust of Scotland (STS) aims to generate rising income and long-term capital growth from a relatively concentrated portfolio of 35 to 55 global equities. Since May 2016, the trust has been managed by Mark Whitehead, who heads up Martin Currie’s income team. A new unconstrained, high-conviction investment approach was adopted on 1 June 2016, with performance measured against a peer group comprising both closed- and open-ended funds. STS has outperformed the peer group since the change in investment strategy. The trust actively uses gearing and has a progressive dividend strategy; its current dividend yield is 3.5%.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

Securities Trust of Scotland

New manager driving improved performance

Investment trusts

29 August 2017

Price

169.6p

Market cap

£190m

AUM

£218m

NAV*

179.9p

Discount to NAV

5.7%

NAV**

181.5p

Discount to NAV

6.6%

*Excluding income. **Including income. As at 24 August 2017.

Yield

3.5%

Ordinary shares in issue

112.1m

Code

STS

Primary exchange

LSE

AIC sector

Global Equity Income

Share price/discount performance

Three-year performance vs index

52-week high/low

174.0p

148.5p

185.0p

158.3p

*Including income.

Gearing

Gross*

12.4%

Net*

11.0%

*As at 31 July 2017.

Analysts

Mel Jenner

+44 (0)20 3077 5720

Sarah Godfrey

+44 (0)20 3681 2519

Securities Trust of Scotland is a research client of Edison Investment Research Limited

Securities Trust of Scotland (STS) aims to generate rising income and long-term capital growth from a relatively concentrated portfolio of 35 to 55 global equities. Since May 2016, the trust has been managed by Mark Whitehead, who heads up Martin Currie’s income team. A new unconstrained, high-conviction investment approach was adopted on 1 June 2016, with performance measured against a peer group comprising both closed- and open-ended funds. STS has outperformed the peer group since the change in investment strategy. The trust actively uses gearing and has a progressive dividend strategy; its current dividend yield is 3.5%.

12 months ending

Share price
(%)

NAV
(%)

Blended
benchmark (%)

FTSE All-Share
(%)

MSCI World
(%)

31/07/13

27.4

25.1

23.7

24.3

28.1

31/07/14

(4.4)

(1.0)

4.3

5.6

4.7

31/07/15

(2.9)

5.4

6.5

5.4

14.1

31/07/16

17.3

17.5

22.3

3.8

17.7

31/07/17

14.0

13.6

13.1

14.9

17.6

Source: Thomson Datastream. Note: All % on a total return basis in pounds sterling. Blended benchmark is FTSE All-Share Index until 31 July 2011, MSCI World High Dividend Yield Index until 31 May 2016 and the rolling three-year median return of open- and closed-ended peers thereafter.

Investment strategy: Improved fundamental approach

Since becoming manager of STS in May 2016, Whitehead has adopted a more rigorous fundamental approach to stock picking. While continuing to focus on quality companies with strong cash flows, which offer support for rising dividends and are trading below their assessed intrinsic value, the manager also undertakes credit and scenario analyses to understand the inherent risks in a company’s business model. In September 2016, STS increased its structural gearing. Net gearing of up to 20% of net assets is permitted; at end-July 2017 it was 11.0%.

Market outlook: P/E valuations above 10-year average

Equities have continued to move higher so far in 2017, as investors shake off macro uncertainties and instead focus on improving global corporate earnings growth. On a forward P/E basis, equity valuations remain c 20% above their 10-year averages for both UK and global companies. In such an environment, investors may decide to focus on an actively managed fund with a diligent fundamental approach to stock picking.

Valuation: Discount wider than historical averages

STS’s current 6.6% share price discount to cum-income NAV is higher than the averages of the last one, three, five and 10 years of 5.6%, 5.6%, 2.4% and 3.9%, respectively. In 2015, the board introduced a new higher-yielding and progressive dividend policy aiming to bring STS’s yield more in line with the peer group. The FY16 annual dividend was 18.4% higher than in FY15 and was raised by a further 2.6% in FY17. Based on the current share price, STS has a 3.5% dividend yield.

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

Securities Trust of Scotland’s investment objective is to provide rising income and long-term capital growth through a portfolio of global equities. Following the adoption of an unconstrained mandate, from 1 June 2016 the trust measures its performance versus the rolling three-year median return of open- and closed-ended peers, as well as an absolute target to produce real growth in revenue and cum-income NAV on a rolling five-year basis.

21 July 2017: Andrew Irvine (senior independent director) retired at the 2017 AGM; he is replaced by Angus Gordon Lennox, who has served on the board for four years.

21 July 2017: Announcement of first interim dividend of 1.45p.

6 June 2017: Final results for 12 months ending 31 March 2017. NAV TR +26.7% versus peer group TR +26.1%. Share price TR +27.7%. Announcement of fourth interim dividend of 1.60p.

Forthcoming

Capital structure

Fund details

AGM

July 2018

Ongoing charges

1.0%

Group

Martin Currie Investment Mgmt (UK)

Interim results

November 2017

Net gearing

11.0%

Manager

Mark Whitehead

Year end

31 March

Annual mgmt fee

0.6% of net assets

Address

Saltire Court, 20 Castle Terrace, Edinburgh EH1 2ES

Dividend paid

Quarterly

Performance fee

None

Launch date

28 June 2005

Trust life

Indefinite

Phone

+44 (0) 131 229 5252

Continuation vote

None

Loan facilities

£25m (see page 7)

Website

www.securitiestrust.com

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

Dividends are currently paid quarterly in September, December, March and June, (October, January, April and July from 1 April 2018). Dividends were increased for FY16 after the announcement of a new progressive dividend policy.

Renewed annually, the trust has authority to purchase up to 14.99% and allot up to 5% of issued share capital.

Shareholder base (as at 3 August 2017)

Portfolio exposure by geography (as at 31 July 2017, net of cash, gearing and option exposure)

Top 10 holdings (as at 31 July 2017)

Portfolio weight %

Company

Country

Sector

31 July 2017

31 July 2016*

Apple

US

Information technology

3.7

N/A

Philip Morris International

US

Consumer staples

3.5

4.4

Roche

Switzerland

Healthcare

3.3

N/A

Banca Generali

Italy

Financials

3.1

N/A

ING Groep

Netherlands

Financials

2.9

N/A

Chevron

US

Energy

2.9

3.6

Givaudan

Switzerland

Materials

2.7

3.0

Microsoft

US

Information technology

2.6

N/A

Taiwan Semiconductor

Taiwan

Information technology

2.6

N/A

Waste Management

US

Industrials

2.6

3.0

Top 10

29.9

34.2

Source: Securities Trust of Scotland, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in July 2016 top 10.

Market outlook: Earnings multiples above average

The equity backdrop is broadly similar to when our last report was published in February 2017. As shown in Exhibit 2 (left-hand side), over the last 10 years global equities have sharply outpaced UK equities. Over the past year or so, sterling weakness has boosted the value of international equities to UK-based investors. Since early 2016, investors have had significant macro events to consider such as the result of the UK’s European referendum, the surprise election of US President Trump and a series of political elections in Europe. However, in a period of continued low interest rates and improved corporate earnings growth, equities have continued to move higher. As a result equity valuations, measured by forward P/E multiples, remain c 20% above their 10-year averages for both UK and global companies. Investors therefore may be interested in an actively managed fund, with a meaningful dividend yield, that has undergone changes that so far have led to improved investment performance.

Exhibit 2: Market performance and valuation

Performance of indices (over last 10 years, in sterling terms)

Valuation metrics

 

Last

High

Low

10-year
average

Last as % of
average

UK

P/E 12 months forward (x)

14.3

15.6

7.4

12.0

119

Price to book (x)

1.6

2.5

1.2

1.7

93

Dividend yield (%)

3.6

6.6

2.7

3.5

103

Return on equity (%)

8.2

21.2

2.5

10.5

78

World

P/E 12 months forward (x)

15.5

16.0

8.8

13.1

118

Price to book (x)

2.1

2.5

1.1

1.8

118

Dividend yield (%)

2.4

4.6

2.0

2.7

92

Return on equity (%)

10.7

16.9

4.7

11.1

96

Source: Thomson Datastream, Edison Investment Research. Note: Valuation metrics as at 23 August 2017.

Fund profile: Global exposure to income and growth

Launched in June 2005, STS aims to generate rising income and long-term capital growth from a portfolio of global equities that is diversified by sector and geography. Since 11 May 2016, the trust has been managed by Mark Whitehead, who is head of Martin Currie’s income team, which comprises seven income managers and analysts who have an average 18 years of investment experience. On 1 June 2016, STS moved to an unconstrained strategy measured against the median of all relevant open- and closed-ended peers, from the Lipper Global Equity Income and AIC Global Equity Income sectors, respectively, on a rolling three-year basis. In addition, the manager aims to grow the revenue earnings and the cum-income NAV in real terms over a rolling five-year period. STS has a relatively concentrated portfolio of 35-55 large and mid-cap positions, aiming for lower volatility and a high active share versus the broader market. (Active share is a measure of the percentage of holdings in a portfolio that differ from a benchmark.) The maximum size of a single holding is 7% and the total of all holdings over 5% may not exceed 40% of the whole portfolio. Net gearing of up to 20% of NAV is permitted; at end-July 2017 it was 11.0%.

The fund manager: Mark Whitehead

The manager’s view: Marginally less positive on macro outlook

The manager remains constructive on equity markets. He says that corporate earnings growth has been strong in Q117 and Q217, with double-digits earnings growth in Q2 for the key US S&P 500 Index. However, he is marginally less positive on the macro environment than he was at the start of the year. He notes that US economic growth has slipped a little, and to a lesser extent in Europe. Whitehead expects central banks will continue to be accommodative – US Federal Reserve Bank Chairman Janet Yellen has stepped back from telegraphing another hike, which is positive for equities – but there is the potential for commodity prices to roll over, which would put pressure on cyclical stocks. Hence, STS now has higher exposure to structural growth sectors such as technology and consumer, where companies have issued positive earnings guidance for the balance of the year, so the manager believes that STS’s portfolio is well positioned. Whitehead says that stock price volatility has been low and that he expects it to increase towards the end of the year. For the UK, Brexit discussions are ongoing, and there is still some risk that UK economic growth slows further, which is something that the manager is keeping a keen eye on.

Asset allocation

Investment process: More thorough fundamental research

The manager, who is able to draw on the resources of the experienced Martin Currie income team, seeks to invest in quality companies with the potential to generate growth in income and capital over the long term, and which are trading at a discount to their assessed intrinsic worth. According to data from Martin Currie, the shares of high-quality companies with higher-than-average dividend growth have outperformed both equities and bonds, on a risk-adjusted basis, over the long term. Companies considered for inclusion within the portfolio are likely to have sustainable sales growth, high cash flow generation and efficient capital management, which lead to attractive returns. Since taking over the portfolio in May 2016, the manager has repositioned the fund more towards companies that are growing and have a stronger degree of security regarding their dividend payouts, with less of a focus on higher-yielding stocks. The move to an unconstrained mandate has led to broader asset exposure and investment in selected smaller-cap companies. The manager has also started to use options to generate additional revenue (11.3% of total income in FY17). However, he notes that due to low stock market volatility there are currently fewer opportunities to generate income from selling options than there were in FY16.

The manager has revisited the investment case on every stock in the portfolio, which has led to a number of purchases and sales following extensive fundamental research, which now includes credit analysis and scenario testing to better understand the inherent risks in a company’s business model, as well as an assessment of a company’s corporate governance track record. Whitehead ensures that position sizes are larger for his highest-conviction holdings and that the combination of stocks is not reliant on a particular macro factor such as commodity prices or interest rates. Stocks may be sold if the original investment thesis has played out or is called into question, or if there are other higher-conviction investments ideas identified. A 20% fall from the original purchase price automatically triggers an in-depth review of a holding, which may lead to an exit or the manager taking advantage of share price weakness to add to the position.

Current portfolio positioning

At end-July 2017, the top 10 positions totalled 29.9% of the portfolio, which was a decrease in concentration compared to 34.2% at end-July 2016. Exhibit 3 shows STS’s sector breakdown. Over the last 12 months, the largest increases in exposure are financials (including real estate, +10.0pp) and technology (+5.3pp), while the largest decreases are industrials (-5.7pp) and consumer staples (-4.9pp). A relatively new position in the financials sector is ING Groep; the manager believes that the company has a structural advantage, being more fintech than old-world banking, and is at the forefront of online consumer and commercial banking. ING has streamlined its operations as it has disposed of its insurance business. European economic growth is improving and the company is better capitalised than a lot of European banks, is generating decent returns and improving profits, while trading on a reasonable valuation.

The manager considers that technology is an interesting area of the stock market as it has favourable growth characteristics and he believes that the sector is not overvalued, despite its relatively strong performance year to date. A recent addition to the portfolio is US semiconductor manufacturer Broadcom, which along with STS’s other technology holdings, such as Apple and Microsoft, generates strong free cash flow, which underpins their dividends.

Within healthcare (the second largest sector exposure), US pharma company Pfizer was sold as the manager highlights the pressure on industry pricing. The pharma sector is always interesting for income funds because of the structural yield, but the manager suggests that the yield does not really grow and adds that in the last 10 years, the sector has found pipelines difficult to manage. It has been an interesting two or three years, with a lot of excitement about oncology, diabetes and Alzheimer’s, but these are competitive therapies, with companies investing a lot of capital into research and development and not necessarily getting a good return. Hence the pharma companies have been reliant on price increases, which are now under threat.

US healthcare company Anthem has been added to the portfolio as the manager thinks that the company can become a market leader. It is the second largest US managed care organisation, providing medical insurance cover to corporates and individuals. It had a proposed merger with Cigna that fell through, but the manager believes that Anthem still has opportunities to continue to grow quite aggressively. He suggests that the failure to reform the Affordable Care Act is not a bad outcome for Anthem as it can continue to provide insurance to the Medicare/Medicaid programmes.

Exhibit 3: Portfolio sector exposure (% unless stated)

Portfolio end-July 2017

Portfolio end-July 2016

Change (pp)

Financials

23.5

22.2

1.3

Healthcare

11.3

14.0

(2.7)

Industrials

11.0

16.7

(5.7)

Information technology

10.9

5.6

5.3

Consumer discretionary

10.9

6.0

4.9

Materials

9.9

5.2

4.7

Consumer staples

8.9

13.8

(4.9)

Real estate*

8.7

N/A

N/A

Energy

6.9

7.5

(0.6)

Telecommunications

4.1

8.8

(4.7)

Utilities

4.0

7.0

(3.0)

Cash

1.4

2.6

(1.2)

Active options exposure

0.9

(0.1)

1.0

Gearing

(12.4)

(9.3)

(3.1)

100.0

100.0

Source: Securities Trust of Scotland, Edison Investment Research. Note: *Real estate was part of the financials sector in July 2016.

The manager has used the increased level of gearing to broaden the trust’s asset exposure, buying companies with dividend yields in excess of STS’s cost of debt, which also offer the potential for capital growth. Purchases include Civitas Social Housing (a housing REIT), Greencoat UK Wind (an investment trust invested in infrastructure) and Apax Global Alpha, which gives public-market access to Apax’s private equity funds. It has a 14% pa target return including 5% in dividends.

Performance: Outperforming the new benchmark

During FY17, STS’s NAV and share price total returns of +26.7% and +27.7%, respectively, were modestly ahead of the peer-group benchmark total return of +26.1%. The largest positive contributors were US integrated energy company Chevron and tobacco companies Philip Morris and British American Tobacco, while the largest detractors included satellite companies Eutelsat Communications and Inmarsat.

Exhibit 4: Investment trust performance to 31 July 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 10-year performance figures annualised. Blended benchmark is FTSE All-Share Index until 31 July 2011, MSCI World High Dividend Yield Index until 31 May 2016 and the rolling three-year median return of open- and closed-ended peers thereafter.

STS’s relative returns are shown in Exhibits 5 and 6, while details of its blended benchmark are included in the note below Exhibit 4. Since adopting the new unconstrained benchmark at the beginning of June 2016 to date, the trust has outperformed the peer-group benchmark by c 3.5pp, although relative performance has been more volatile.

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

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to blended benchmark

(1.3)

(1.2)

(1.7)

0.8

(11.9)

(16.8)

(12.7)

NAV relative to blended benchmark

(0.4)

(0.3)

1.4

0.4

(4.4)

(8.2)

(17.1)

Price relative to FTSE All-Share

(2.0)

(1.5)

(3.6)

(0.8)

3.3

(4.2)

9.1

NAV relative to FTSE All-Share

(1.1)

(0.6)

(0.6)

(1.1)

12.0

5.7

3.6

Price relative to MSCI World

(1.8)

(1.7)

(2.6)

(3.1)

(17.8)

(25.4)

(23.7)

NAV relative to MSCI World

(0.9)

(0.8)

0.5

(3.4)

(10.9)

(17.7)

(27.6)

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

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

Source: Thomson Datastream, Edison Investment Research

Discount: Towards the wider end of historical range

The board operates a discount management policy aiming to keep the average discount below 7.5% in the last 12 weeks of the financial year. If the average ex-income discount is wider than 7.5% over this period, shareholders have the right to redeem their shares. There are also ad hoc share repurchases (see Exhibit 1). STS’s current 6.6% share price discount to cum-income NAV is towards the top end of the 12-month range of a 1.9% to 8.1% discount, which occurred in October 2016 ahead of the US presidential election. It is also wider than the averages of the last one, three, five and 10 years (range of 2.4% to 5.6%).

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

Source: Thomson Datastream, Edison Investment Research

Capital structure and fees

STS is a conventional investment trust with one class of share; there are currently 112.1m ordinary shares in issue, with a further 10.2m shares held in treasury. In September 2016, taking advantage of prevailing low interest rates, STS increased its structural gearing from £17m to £25m in the form of a £10m two-year revolving credit facility and a seven-year multi-currency fixed facility with Royal Bank of Scotland split as follows: £1.50m at 2.1408%, €4.50m at 1.4175% and $12.75m at 3.1925%. At the end of FY17, average borrowing costs were 1.94%. STS is permitted to gear up to 20% of net assets; at end-July 2017, net gearing was 11.0%. The gearing is being employed by investing the majority in global equities and also by the tactical use of options.

STS pays Martin Currie an annual management fee of 0.6% of net assets, split 65:35 between capital and income (which is the board’s expected long-term split of returns between capital gains and income); no performance fee is payable. In FY17, the ongoing charge was once again at the targeted level of 1.0%; it has been at this figure since FY13.

Dividend policy and record

STS currently pays quarterly dividends in September, December, March and June; but from 1 April 2018, they will be paid in October, January, April and July. For FY16, the board adopted a progressive dividend policy, aiming to bring STS’s dividend yield more in line with the peer group. The annual dividend of 5.80p was an 18.4% increase versus the prior year. In FY17, the annual dividend was increased again, by 2.6% to 5.95p. Based on the current share price, STS yields 3.5%. Under the new dividend policy, while the manager is focused on growing income over the longer term aiming to cover the dividend, payments may also be paid out of revenue reserves and capital if required. In FY17, just 3.5% of the dividend came from revenue reserves. At the financial year end, STS had a revenue reserve of £1.9m and a capital reserve of £70.5m versus an annual dividend payment of £6.7m.

Peer group comparison

In Exhibit 8, we compare STS to the other seven peers in the AIC Global Equity Income sector (which have a track record longer than 12 months), with an understanding that the trusts have a variety of mandates. STS’s NAV total returns are below average over the periods shown, ranking seventh, fifth and sixth out of eight funds over one, three and five years, respectively, and fifth out of five funds over 10 years. We also include the simple averages of the open-ended peers in the IA Global Equity Income sector. STS’s NAV total returns are ahead of these averages over one and three years, while lagging over five and 10 years. STS trades at a wider-than-average discount, in a sector where more than half of the peers trade at a premium. Its ongoing charge is lower than average and its net gearing is broadly average. STS offers a lower-than-average dividend yield, but the peer group average is skewed by the large dividend yield of Blue Planet Investment Trust (which currently is predominantly invested in bonds); if this fund is excluded, STS’s dividend yield is broadly in line with the closed-end peer group average.

Exhibit 8: AIC Global Equity Income peer group as at 25 August 2017*

% unless stated

Market cap/
fund size £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 (%)

Securities Trust of Scotland

190.2

14.8

41.9

75.3

92.1

(5.4)

1.0

No

111

3.5

Blue Planet Investment Trust

23.0

11.0

19.5

80.0

(10.3)

3.7

No

128

10.0

F&C Managed Portfolio Income

58.5

17.4

30.3

70.4

2.3

1.1

Yes

98

3.9

Henderson International Income

284.0

19.9

54.7

100.2

1.2

1.0

No

100

2.9

Invesco Perp Select Global Eq Inc

65.9

20.4

52.1

105.6

149.5

(1.9)

1.0

Yes

108

3.2

JPMorgan Global Growth & Income

390.9

24.8

60.0

116.0

193.6

0.2

0.6

Yes

106

3.9

Murray International

1,636.4

18.9

40.8

66.4

185.5

3.5

0.7

No

112

3.8

Scottish American

492.1

19.3

53.0

88.5

95.4

3.0

0.9

No

118

3.0

Simple average (8 funds)

392.6

18.3

44.0

87.8

143.2

(0.9)

1.2

110

4.3

STS rank in sector

5

7

5

6

5

7

4

4

5

Open-ended peers simple average

404.5

14.2

38.8

80.9

96.2

1.5

3.3

Source: Morningstar, Edison Investment Research. Note: *Performance to 24 August 2017. TR=total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

The board

Following the retirement of senior independent director Andrew Irvine at the 2017 AGM following 12 years’ service, there are now four directors on the board of STS; all are non-executive and independent of the manager. The board considers that it has sufficient skills and experience to continue at its current size; although this will remain under review. Chairman Rachel Beagles was appointed in July 2010 and assumed her current role in July 2016. The senior independent director is now Angus Gordon Lennox; he joined the board in November 2013. The other two directors are Mark Little (appointed in October 2014) and John Evans (appointed in February 2016). All four directors hold shares in STS ensuring the interests of all shareholders are aligned.

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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 2017. “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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Securities Trust of Scotland 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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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