Why value-focused investors will see the best opportunities after the sell-off

Scottish Investment Trust’s Alasdair McKinnon explains how he has protected his portfolio, and why he sees ‘tremendous opportunities in due course’.  

Like almost every other investment trust, the value-focused Scottish Investment Trust (SCIN) has suffered painful double-digit price falls over the past month. Its share price had declined 30% as of 19 March (although it has bounced 10% today, 20 March), as investors ran for the hills.

However, while the Association of Investment Companies (AIC) global sector has seen an average decline in net asset values of 24%, the value of SCIN’s underlying assets has fallen only 15% over that time – the smallest decline in the sector. It currently sits on a 28% discount, the second largest in the sector, having slipped from around 8% at the start of the year.

The trust’s manager, the contrarian investor Alasdair McKinnon, says he realised in early February that the writing was on the wall for western economies as the coronavirus took hold and spread, but that markets still remained remarkably complacent, with growth stocks apparently enjoying “perpetual euphoria”.

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“We said, if the global economy ends up in total lockdown like Wuhan (the Chinese province where the pandemic started) or partial like Japan, which companies are going to make it through? Many retailers will have to shut, oil will be used less, banks will face zero or negative interest rates. It was a very simple process really – we sold anything we thought would be exposed,” he says.

McKinnon bought defensive holdings including utilities, tobacco and gold miners (“if it comes to government support, printing money is pretty gold-friendly”). “We’ve turned as bearish as an equity fund can be,” he comments. “This is at least as bad as 2008, if not worse.”

However, he sees the massive interventions by governments, including interest rate cuts and huge financial help plans for businesses and families, as “very good news” for the value stocks he seeks out.

“Value stocks are already priced for recession or depression, and now this massive stimulus is taking place. There’s still further to go before any corner is turned, but when we get through this there will be the most tremendous opportunities.

“There are lots of very good companies out there, they’ve all been hit very hard; but they will be best-placed when this extraordinary stimulus takes effect. There will be a bounce back for oil, and for consumer spending power, and that’s where we’ll be looking in due course – buying back what we sold, ideally.”

McKinnon believes “helicopter money” – whereby large sums of money are printed and given out to people to stimulate spending – is bound to happen. “If the economy is shutting down, how will many people survive without it? Otherwise we are likely to see civil uprisings.”

Scottish Investment Trust is an AIC dividend hero, with 36 consecutive years of dividend increases under its belt, and maintaining that record is also central to its mandate. 

In this respect McKinnon is pretty relaxed, despite the likelihood that many companies globally will suspend or slash dividend payouts to maintain their cashflow.

“We hold companies where things are as safe as they can be on the dividend front,” he says, pointing to the likes of telecoms, utilities and oil companies. He doesn’t expect it to be an easy year for income-seekers, as companies are either forced to cut their payouts or use the crisis as an opportunity to trim back what had become an unsustainable position.

But, he adds: “We have three years of dividend reserves. That means we could make our ordinary distributions for three years, even if we received no dividend income at all during that time. So we’re in a very strong position.” The trust currently yields 4.1%, up from 3.3% at the start of the year and the second largest yield in the global sector.

 “At the moment we’re in capital preservation mode – we look at companies from a bottom-up perspective, but if the global economy is in shutdown we can’t get a handle on where earnings will go from here,” says McKinnon. “But when we’re through the worst and can value companies properly again – and I’ve no idea when that will be – I will be tremendously excited.”

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