As the Scottish independence referendum has gripped the headlines, there is some evidence of widening discounts (and reduced premiums) on a number of the 41 investment trust companies based in Scotland, which may indicate some panic selling from private investors.
Ditching these trusts on referendum concerns is unwarranted at the current point in time in our view. None have strategies narrowly confined to investing in Scotland, so the much-debated economic risks associated with an independent Scotland are not a material factor in their investment portfolios. Indeed many of these trusts invest in global equities, so are exposed to the US recovery and the opportunities in emerging markets – not the uncertainties around Scotland’s EU membership, currency or declining North Sea Oil revenues.
These trusts are listed on the London Stock Exchange and would certainly continue to do so were Scotland to choose independence. London is a premier global capital market, home to companies from across the world - and besides, Scotland does not have its own stock exchange. As most will predominantly have shareholders based in England, there is no reason why dividends wouldn’t continue to be paid in sterling.
While there is a hypothetical case that in a scenario of an independent Scotland, tax rates or rules for investment companies could diverge from the UK (favourably or unfavourably) at some future point, and there are questions to be answered about the regulatory regime in a potentially independent Scotland, there is no such proposal on the table. Indeed it is unlikely that the Scottish government would be particularly punitive towards investment trusts as there would be considerable local backlash.
Nevertheless, it would be quite possible for Scottish-incorporated investment companies to choose to re-domicile for regulatory or tax reasons. Other companies have done this in the past (Henderson moved its domicile to Ireland from 2008 to 2012 for tax reasons) and a number of Scottish financial services institutions, including RBS and Standard Life, have indicated they may do so in recent days in the event of a yes vote. Almost certainly, Scottish-based investment companies will have considered contingency plans in recent months with their legal advisers and corporate brokers.
With a year and half between next week’s vote and the earmarked date for independence, there would be time for Boards to determine an appropriate course of action. While this would involve some work and time from the Boards and their advisers, and some associated costs, crucially fund managers would not expect to be involved in such a process. Their job is to manage the portfolio.
Scottish-based investment companies we rate highly include:
Scottish Mortgage Investment Trust (3 stars)
This trust is managed by Baillie Gifford veteran James Anderson and invests in global growth companies with significant exposure to the US and China. Its largest holding at 9% is Chinese firm Baidu. The trust provides gung-ho active management at a low annual cost of 0.5%. Such is demand for the trust it typically trades at a premium but it is currently at a slight discount of 1.4% to NAV.
Alliance Trust (3 stars)
We view this giant trust as a solid, core holding for a modest investor wanting to access global equity markets. Almost half the portfolio is invested in US equities (48%), with 22% in the UK, 19% in Europe and 10% in Emerging Markets. Current discount to NAV is 14.1%.
Murray International (3 stars)
Part of Aberdeen Asset Management’s stable of closed-ended companies, this trust which is managed by Bruce Stout invests in global equities with a modest exposure to fixed income (~10%). Some 27% of the portfolio is invested in Latin America, with an additional 23% in Asia. The UK exposure is below 14%. The trust has a brief to deliver income to investors and currently yields 4.6%. Such is the demand for income the trust has traded at a premium as high as 11% over the last year and at an average level of 6%. The current premium has reduced to 4%.