STS Global Income & Growth Trust

From:    Securities Trust of Scotland plc

LEI:         549300UZ1Y7PPQYJGE19

Date:     20 May 2022

Results for the year ended 31 March 2022

The board of Securities Trust of Scotland plc (the 'company') are pleased to announce the company's results for the year ended 31 March 2022.

The following is an extract from the company's Annual Report and Financial Statements for the year to 31 March 2022. The Annual Report is expected to be posted to shareholders shortly.  Members of the public may obtain copies from the registered office, 28 Walker Street, Edinburgh EH3 7HR or from its website: www.stsplc.co.uk. A copy will also shortly be available for inspection at the National Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

Highlights

·    The company's objective is to achieve rising income and long-term capital growth through investment in a balanced portfolio constructed from global equities.

·    The net asset value total return for the year to 31 March 2022 was +16.8%, and the share price total return was +17.4%, compared to a total return of +10.8% in the Lipper Global - Equity Global Income Index. This compares to a net asset value return of +28.5%, a share price total return of +23.7% and a total return of +29.9% in the Lipper Global - Equity Global Income Index in the previous year.

·    The company pays quarterly dividends to provide investors with a regular income. Dividends are paid in April, July, October and January. The dividend was rebased as part of the management changes. The board has announced a fourth quarterly dividend of 1.75 pence per ordinary share which will be paid on 1 July 2022 to shareholders on the register on 27 May 2022. The total dividend for the year will be 5.875 pence per share.

Chairman's Statement

Introduction

The year to 31 March 2022 proved to be a remarkably eventful period that commenced with a sustained recovery from the economic effects of the COVID pandemic before concerns regarding rapidly rising rates of inflation and the required policy response across the G7 began to dominate financial markets. In February 2022 Russian forces invaded Ukraine raising geopolitical risk to levels not seen this century.

Against such an uncertain background it is pleasing to be able to report positive returns for the year.  The net asset value total return was +16.8% and the share price total return was +17.4%, as the share price moved from a 0.3% discount to the net asset value to a slight premium over the year.  The Lipper Global - Equity Global Income Index produced a total return of +10.8% for the same period.

There currently seems to be no respite in the challenges being thrown at financial markets. As mentioned, against a background of already rising rates of inflation the war in Ukraine has led to a sharp rise in oil and, in particular, gas prices and shortages are predicted for many major commodities including several foodstuffs.  With inflation rates now higher than previously forecast, Central Banks are responding by raising short term interest rates and reversing the quantitative easing that was a response to the COVID related lockdowns.

Managing a global portfolio against such a fast evolving and uncertain background is no easy task and your board is reassured by the manager's clear investment philosophy and the consistent application of that policy. Portfolio turnover, by industry standards, is low. Your manager carefully selects companies that have the profitability and cash flow to generate long term real rates of return and then backs them to do so.

Securities Trust has been managed by Troy and administered by Juniper Partners since November 2020 It is pleasing to report that all aspects of the relationship between the board and managers are working well. The board are encouraged by the approach to fund management and the integration of ESG considerations into the investment process as well as the marketing and promotion of the trust.

Revenue and dividends

Revenue earned for the year was £7.4 million, 19% lower than in the prior year.  The decline was principally a result of two factors - no income was received from option writing and the portfolio constructed by the new managers, appointed in November 2020, has a lower yield than the portfolio of the previous manager. The board and managers were fully aware of these changes and their effects were anticipated.  Somewhat offsetting the lower income was the fact that costs were lower, reflecting the initial fee arrangement agreed at the time of Troy's appointment.

It is the board's policy to use revenue reserves, when considered appropriate, to assist in managing the long term growth of the dividend paid to shareholders. At 31 March 2022, the company has total revenue reserves available for distribution of £3.1m, which includes £1.3m of undistributed reserves from the prior financial year. A fourth quarterly dividend of 1.75 pence per share has been declared and will be paid on 1 July 2022 to shareholders on the register on 27 May 2022.

The total dividend for the year is therefore 5.875 pence per share an increase of 3.1% on the dividend of 5.70 pence per share paid in respect of the previous financial year.

Board changes

Angus Gordon Lennox was appointed as a director of Securities Trust of Scotland in 2013 and in line with best governance practice will retire from the board at the AGM in July 2022. Angus has made a significant contribution to the board over his tenure, and I would like to thank him on behalf of the board for his commitment, wisdom and frequent valuable insight.

Angus has been the Senior Independent Director of the company since 2018 and Sarah Harvey has agreed to take on this role upon Angus's retirement.

The board is pleased to announce that Alexandra Innes was appointed as a non-executive director on 4 April 2022. Alexandra is a Non-Executive Committee Member at the Bank of England and a member of the Group Executive Board and the Technology Investment Board at Knight Frank LLP.  Alexandra held a number of senior positions in the financial sector during her executive career and she will bring fresh perspective to the board. We look forward to working with her.

Discount management

Your company has adopted and implements a formal discount control mechanism. It is the intention that the application of this policy will, in normal market conditions, see the shares valued consistently at close to their asset value. Shares will be bought by the company should they trade at a discount and if there are sellers in the market. Likewise, shares will be issued to meet demand should there be buyers.

In the year to 31 March 2022, 3,043,000 shares were purchased by the company at an average discount of 1.7% and 100,000 shares were issued at a premium of 1.3%. Since the year end a further 480,000 shares have been issued at an average premium of 1.1%.

The discount control mechanism is administered by Juniper Partners ("Juniper") and a close dialogue is maintained between the board and Juniper to ensure the efficient implementation of the discount control mechanism.

Gearing

Your company has total debt facilities available of £25.0 million and at the year end £15.0 million of these facilities were drawn down. Gearing is a topic regularly discussed between your board and managers. During the year average debt drawn down was £14.7 million.

Environmental, social and governance ('ESG')

The company aims to conduct itself responsibly, ethically and fairly and the board seeks to ensure that the manager's management of the portfolio takes account of ESG matters as an integral part of its analysis of companies for investment. The board believes that companies which exhibit positive ESG behaviours contribute to increasing value over the long term and that it is in shareholders' interests to consider ESG factors when selecting and retaining investments. The board encourages and actively oversees Troy's application of its ESG policies within the investment process. In addition to this, during the year the company published an ESG policy on the AIC website (www.theaic.co.uk) and further details of this policy can be found on pages 10 and 11 of the Annual Report.

Annual General Meeting

It is the current intention to hold a "traditional" meeting to which all shareholders are invited and welcome to attend. After two years of COVID related restrictions your board is delighted to be able to return to normal and looks forward to meeting shareholders in person on 4 July 2022.

Keeping in touch

I would encourage shareholders to visit the company's website at www.stsplc.co.uk which can be found in the QR link on page 4 of the Annual Report. This offers a wealth of further information on the company including videos, articles and a highly rated podcast series to understand more about our manager's investment philosophy. Through the website you can also subscribe to monthly email updates and the factsheet which will provide you with portfolio information and performance data. If you wish to contact the investment manager or the company secretary with any queries this can also be done through the website or by email using the email addresses set out on the inside back cover of the Annual Report.

Outlook

The appalling events in Ukraine dominate thoughts and the humanitarian crisis that the Russian invasion has created is utterly dreadful. While very mindful of this, the invasion, subsequent war and rhetoric from the Kremlin has added heightened geopolitical risk to an already uncertain global background. The rise in energy and commodity prices that the war and economic sanctions produced has caused inflation to accelerate from an already extended level and will force interest rates to rise further than had been previously considered.  This is a very different macro background to that which US financial markets in particular enjoyed in the very recent past.

The recent weakness in the exchange rate of Sterling against most major currencies, but in particular against the US Dollar, is notable and is of benefit to your company. The Sterling value of overseas investments and the dividends they pay rises. While 30% of the portfolio is invested in UK Equities the majority of these companies are global businesses and likewise beneficiaries of a weak pound.  While this currency weakness may prove to be transitory it does highlight some of the benefits of adopting a global as opposed to a more limited country only approach to an equity income mandate.

Your managers are being consistent in their management of the portfolio which is invested in strong companies both in terms of their financial performance and market positioning. Companies with such strengths should be well placed to cope with the challenges of rising costs and higher levels of inflation.

The core attributes of your manager's philosophy combine preservation of capital and the objective of delivering above average returns with below average levels of volatility. These objectives are particularly appropriate in the current uncertain world.

John Evans

19 May 2022

Manager's Review

The company generated a strong return for shareholders in the first full year under Troy's management. As the world has continued to recover from the COVID shock and bolstered by monetary and fiscal stimulus, markets made good progress. This continued for the first three quarters of the year until the appalling events in Ukraine dented optimism, caused equity markets to sell off and commodity markets to extend gains.

Our performance for the year as a whole has been satisfactory and has been achieved despite a number of events buffeting the world economy and markets. Inflation has become a major concern for investors and the authorities which marks a major change in the investment backdrop - at least for now.

Performance

As noted in the Chairman's statement, over the 12 months to 31 March 2022 the company delivered a net asset value ('NAV') total return of +16.8% and a share price total return of +17.4% reflecting a move in the share price from a small discount to a small premium relative to the NAV. This compares to the Lipper Global - Global Equity Income return of +10.8%.

The strongest contributors to the return were derived from the consumer staples and information technology sectors. Within information technology the best performing investments over the period were Paychex and Microsoft. Microsoft continues to benefit from companies using an increasing range of the software that the company offers driving impressive growth and returns. Paychex is a payroll, human resources and employee benefits outsourcing software provider to medium sized businesses in the US. The shares have performed consistently well through the year as employment prospects brightened. ADP, a competitor to Paychex, also performed well. Each of these companies continue to show resilient operating performance and consistent dividend growth.

Within consumer staples, Diageo and British American Tobacco were the key contributors. The resilience and valuation in the context of strong pricing power for these companies has been reappraised by investors in these more inflationary times. Both companies have also benefitted from people being able to go out and enjoy themselves. In the case of British American Tobacco, the shares were given further support following the reintroduction of a share buy back as debt on the balance sheet has been reduced to more comfortable levels.

Ironically the areas of less good performance were also concentrated in consumer staples and information technology showing the widening gyre of post-COVID economic fortunes even within sectors. One of the notable aspects of share price movements during the period under review has been the extent to which investors have rewarded companies who they perceive to be able to pass on price increases compared to those that will struggle to do so. Thus, while companies such as Diageo and Pepsi have done well, others such as Unilever and Clorox have lagged.

Unilever has been under a cloud for some time. The most notable recent development was a failed bid for the split-off consumer assets from GlaxoSmithKline which was abandoned following shareholder dissatisfaction with the deal (a sentiment shared by Troy). Investors have worried that the business has suffered from sluggish execution, exposure to slow-growing categories and muddled communication. We believe these issues are all fixable. Longer term we consider Unilever to be an attractive asset for the company which owing to the concerns outlined is attractively valued. We are maintaining our investment.

Clorox has been disrupted by COVID. Whereas in the UK we say Dettol in the US they say Clorox. Unsurprisingly demand for their products was pulled forward during the pandemic. As this demand has receded the business has found it difficult to respond. Rising input costs, notably oil, have also been problematic. We still think this remains a high quality business long term and expect short term virus-driven distortions to normalise.

Also, within consumer staples Reckitt Benckiser was lacklustre over the period having also been disrupted by COVID. Further, the company made a poor capital allocation decision when acquiring the infant formula company, Mead Johnson, in 2017. The company, under new management, is in the process of unwinding this decision. We continue to think this is a sound long term investment owing to the strength of its brands and dominant market positions.

Western Union was also weak over perennial concerns relating to its competitive position in an age of digital disruption. We continue to think these fears are overstated and encapsulated in an extremely attractive valuation. The shares trade on a 13% free cash flow yield.

Finally Vonovia was weak over this period. Over shorter term periods this company tends to be correlated with interest rates which have been on the rise. Negative bond yields have been a feature of the German bond market for some time but have recently turned positive again. While Vonovia may continue to tread water if yields rise, the investment case is predicated on the extraordinary value that German residential property continues to offer. Over longer periods of time we would expect this value component to trump the interest rate effect.

Portfolio activity

There were very few changes made to the portfolio during the year. We sold Verizon to fund an investment in Boston Properties, bought and sold Hargreaves Lansdown (an unusually short holding period for Troy) and established an investment in Domino's Pizza funded by the sale of Fevertree.

Boston Properties is the largest office REIT in the US, with prime properties in five coastal cities; Boston, New York, Washington, Los Angeles and San Francisco. Our belief is that the widely-held view that there will be materially less need for prime office space post COVID will ultimately prove to be overstated - despite the reality of a hybrid working environment. Our view is that knowledge-based economies benefit from network effects requiring face-to-face interaction which requires offices. The shares have performed well this year as the US economy has reopened.

The purchase and subsequent sale of Hargreaves Lansdown was a nuanced investment decision. We still think the company has a terrific long term opportunity to be the UK's leading digital wealth manager. The problem is that increased competition is putting pressure on pricing. This was exemplified by an announcement by rival, AJ Bell, that they would be launching a commission-free investment platform named DODL. We initially established a modest investment in the company with a view to increasing the scale of the investment should the valuation become more attractive. As we had become incrementally more negative and in the context of a still full valuation, we decided to sell.

Domino's Pizza is the UK's leading pizza franchise. We have long felt that this is an excellent business which has been undermanaged. This has changed as a newly invigorated board and new CEO have begun to improve operations. This was manifest during the year as the company announced a new agreement with franchisees following a long-running dispute. This should allow Domino's to grow more quickly as new stores are opened and promotional spend becomes more effective. Despite these developments, the company trades at a discount to similar assets around the world and makes for a compelling, resilient, long term investment case.

Investment strategy

A torrent of negative news flow has characterised the recent past, most obviously the horrific events in Ukraine. To this must be added a spike in inflation, a commodity price shock and the ongoing agonies of COVID, especially in China. Not only does this make for a much less stable backdrop it also, crucially in our view, has led to a material change in the investment backdrop.

Years of accommodative policy both monetary and fiscal, could be prosecuted with abandon so long as inflation was contained. This is no longer the case.

We have long worried that policymakers have been too focused on keeping goods and services prices subdued while allowing asset prices to rise. Not only is this likely to lead to unpleasant side effects such as inequality and the misallocation of capital but also leaves valuations vulnerable should it be necessary to rein in the supportive policy. That moment appears to have arrived.

Thus, the interest rate on a two year treasury note in the US has moved from 0.2% in September 2021 to 2.34% at the end of March 2022 (and has continued to rise since that date) as investors have anticipated rising short term interest rates. Interestingly longer term rates have been more measured with the US 10 year moving from 1.29% to (coincidentally but notably) 2.34% over the same period. As a result, the yield curve has "flattened" and ultimately inverted. This suggests that the mooted rate rises may precipitate a slowdown or even recession.

At the same time Central Banks around the world have indicated that they will cease and reverse quantitative easing. It is likely this has supported asset prices in recent years and its withdrawal may do the opposite.

All together this represents a far less emollient policy backdrop for risk assets and makes recent weakness in equity and credit markets unsurprising. A normalisation of policy appears to be leading to a normalisation of valuation which will be felt most keenly by the most fully priced assets. In this context, the war in Ukraine is likely to accentuate existing trends. Unfortunately, it will likely mean we have still more inflation in the short term, fewer rate rises (as the high oil price sucks demand from elsewhere in the economy) and a steeper recession than would otherwise have been the case.

We have constructed the portfolio to be robust to a range of outcomes by investing in companies which we consider to be both resilient and high quality. The same competitive advantages that allow companies to sustain a high return on capital employed and an attractive margin structure are also those that allow companies to raise prices to offset rising costs. Such attributes have benefitted the company this year and should continue to do so long into the future.

Looking forward, there are a number of companies in which we would like to invest, should the opportunity present itself, that are rapidly becoming better value. This will likely allow us to upgrade the quality and income growth embedded in the portfolio should prices continue to fall.

Even as we are horrified by the humanitarian disaster unfolding in Ukraine, we are remaining rational in our investment approach and are confident the company will continue to deliver growing free cash flow funding an attractive and growing income steam as well as long term capital growth.

James Harries

19 May 2022

For further information contact:

Troy Asset Management

Investment Manager

Tel:  0207 499 4030

Juniper Partners Limited

Company Secretary

Tel:  0131 378 0500

Responsibility statement

The Directors confirm that to the best of their knowledge:

·    the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', give a true and fair view of the assets, liabilities, financial position and profit or loss of the company;

·   the annual report, including the strategic report, includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal and emerging risks and uncertainties that it faces; and

·   the annual report and financial statements, taken as a whole, are fair, balanced, and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.

Principal risks

The company's business model is longstanding and resilient to most of the short-term uncertainties that it faces, which the board believes are effectively mitigated by its internal controls and the oversight of the manager, as described in the table below. The principal and emerging risks and uncertainties are therefore largely longer term and driven by the inherent uncertainties of investing in global equity markets.

The board believes that it is able to respond to these longer-term risks and uncertainties with effective mitigation so that both the potential impact and the likelihood of these seriously affecting shareholders' interests are materially reduced.

Operational and management risks along with a review of potential emerging risks, are regularly monitored at board meetings and the board's planned mitigation measures for the principal and emerging risks are described in the table below. As part of its annual strategy meeting, the board carries out a robust assessment of the principal and emerging risks facing the company, including those that would threaten its business model, future performance, solvency, or liquidity.

The board maintains a risk register and also carries out a risk workshop as part of its annual strategy meeting. The board has identified the following principal risks to the company:

Following the ongoing assessment of the principal and emerging risks facing the company, and its current position, the board is confident that the company will be able to continue in operation and that the processes of internal control that the company has adopted and oversight by the manager and the company secretary continue to be effective.

Going Concern

The company's business activities, together with the factors likely to affect its future development, performance and position are set out in the chairman's statement, manager's review, strategic report and the report of the directors in the Annual Report.

The company has a one year revolving credit facility for £10,000,000 which expires in September 2023, which was undrawn at 31 March 2022. In addition, the company has a multi-currency fixed facility, which expires in September 2023, in three tranches of £1,500,000, €4,500,000 and US$12,750,000, all of which were fully drawn down at the year- end date. No decision has yet been taken in relation to the renewal of the borrowing facilities. Should they not be renewed then the company has adequate financial resources in the form of readily realisable listed securities and as a result the directors assess that the company is able to continue in operational existence without the facilities.

In accordance with the 2019 AIC Code of Corporate Governance, the directors have undertaken a rigorous review of the company's ability to continue as a going concern. The company's assets consist of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale. The directors are mindful of the principal and emerging risks and uncertainties. They have reviewed revenue forecasts (adjusted for various sensitivities) and they believe that the company has adequate financial resources and a suitably liquid investment portfolio to continue its operational existence for the foreseeable future, and at least for the period to 31 March 2024, which is at least 12 months from the date the financial statements are authorised for issue.

The Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity and Statement of Cash Flow follow.

Statement of Comprehensive Income

The total columns of this statement are the profit and loss accounts of the company.

The revenue and capital items are presented in accordance with the Association of Investment Companies (AIC) Statement of Recommended Practice (SORP 2021).

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

Statement of Financial Position

*These reserves are distributable.

Statement of Changes in Equity

*    These reserves are distributable.

** The company does not have any other income or expenses that are not included in the 'Net return attributable to ordinary redeemable shareholders' as disclosed in the Statement of Comprehensive Income on page 42 of the Annual Report, and therefore this is also the 'Total comprehensive income' for the year.

Statement of Cash Flow

*Receipts from the sale of, and payments to acquire, investment securities have been classified as components of cash flows from operating activities because they form part of the fund's dealing operations.

Notes:

1.                    Significant accounting policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (Accounting Standards "UK GAAP") including Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in April 2021. All of the company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss. In preparing these financial statements the directors have considered the impact of climate change on the value of the listed investments that the company holds. As the portfolio consists of listed equities, which are valued using quoted bid prices for investments in an active market, then fair value reflects market participants view of climate change risk.

The company's assets consist of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale. The directors have reviewed revenue forecasts and they believe that the company has adequate financial resources to continue its operational existence for the foreseeable future, and for the period to 31 March 2024, which is at least 12 months from the date the financial statements are authorised for issue.

The principal accounting policies are set out in Note 1 to the Annual Report. These policies have been applied consistently throughout the current and prior year.

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There are no critical accounting estimates or judgements.

Functional currency - the company is required to determine a functional currency, being the currency in which the company predominately operates. The board has determined that sterling is the company's functional currency, which is also the currency in which these financial statements are prepared. This is also the currency in which all expenses and dividends are paid in.

2.            Returns and net asset value

3.            Dividends

The revenue reserves as at 31 March 2022 are £3,058,000, of this £1,750,000 will be used to fund the fourth interim dividend. The amount reflected above for the cost of the proposed fourth interim dividend for 2022 is based on 100,005,075 ordinary shares, being the number of ordinary shares in issue excluding those held in treasury at the date of this report. The articles of association of the company permit dividends to be paid out of capital.

4.            Investments at fair value

Under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc); or

Level 3: significant unobservable input (including the company's own assumptions in determining the fair value of investments). The financial assets measured at fair value through profit and loss are grouped into the fair value hierarchy as follows:

5.            Share capital

There were 3,043,000 shares bought back during the year to 31 March 2022 at a cost of £6,431,000 (2021: 2,917,560 at a cost of £5,692,000). During the year, the company issued 100,000 shares for net proceeds of £199,000 (2021: 625,000 shares for net proceeds of £1,267,000).

6.            Related party transactions

With the exception of the management and secretarial fees, directors' fees and directors' shareholdings (disclosed on page 31 of the Annual Report), there have been no related party transactions during the year, or in the prior year.

The management fee payable in respect of the year ended 31 March 2022 was £635,000 (2021: £814,000), of which £373,000 (2021: £nil) was outstanding at the year-end. The secretarial and directors' fees payable in respect of the year ended 31 March 2022 are detailed in note 3 of the Annual Report. The amount outstanding at the year end for secretarial fees and directors' fees was £3,000 (2021: £nil) and £nil (2021: £nil) respectively.

7.            Further information

These are not statutory accounts in terms of Section 434 of the Companies Act 2006.  Full audited accounts for the year to 31 March 2022 will be sent to shareholders by the beginning of June 2022 and will be available for inspection at 28 Walker Street, Edinburgh EH3 7HR, the registered office of the Company. The full annual report and accounts will be available on the Company's website www.stsplc.co.uk.

The audited accounts for the year ended 31 March 2022 will be lodged with the Registrar of Companies.