Caution is the watchword at the STS Global Income & Growth Trust [LON:STS]. Frustration is also evident as the management team would like to see some more upside from its existing portfolio, but there is also recognition that we are currently navigating uncertain times in financial markets.
The trust’s managers, Troy Asset Management, are deeply aware that STS Global is a conservative, income-bearing investment trust, valued by wealth managers for the position it occupies in portfolios that have been designed for cautious growth and income. That’s what it says on the tin.
James Harries, senior fund manager for STS Global, says “Volatility is your enemy if you are old.” Many investors are in the trust for income and capital preservation, not to shoot the lights out.
The investment trust is the product of the successful recent merger of two trusts: STS and Troy Income & Growth Trust, which was completed on 28 March 2024, and as a result £118 million of assets were acquired by STS, financed by the issue of 52,889,037 new shares in the trust.
It is a feature of the investment trust sector at present that scale, cost effectiveness and liquidity are key drivers of shareholder demand. STS has been able to improve its position in respect of each of these measures as a result of the transaction.
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STS Global’s cautious view on markets this summer
The team under Harries continues to maintain a cautious view given the scale and pace of the rise in interest rates. The trust’s performance has lagged the recent rising market, but this is often the case for the STS brand of conservative, quality-focused investing. Its portfolio has been designed to be resilient even in the event of an economic slowdown – which Harries sees on the horizon – and will deliver a growing income yield to investors.
Investors have anticipated an economic recovery globally – about which Troy AM is sceptical – leading the best performing sectors to be more cyclical areas such as extractive industries, banks, and industrial companies. These are periods in markets when Troy’s quality focussed, conservative approach tends to lag, and this was no exception.
“Exceptional, resilient companies”
STS Global invests in a concentrated portfolio of “exceptional, resilient companies” which are growing their dividends and demonstrate genuinely surplus cash flow. Harries and his team want to see above average returns coupled with below average volatility.
STS Global produced a net asset return of +4.8% of the year ended 31 March 2024. The overall share price gain was +6.1%. Its benchmark, the Lipper Global Equity Global Income Index was up 11.5% over this period.
This is not a high turnover portfolio, but there have been some new additions, with Pernod Ricard and Amadeus entering the fund.
Harries and fellow Troy fund manager Tomasz Boniek are particularly enthusiastic about Amadeus, They see some big changes within the airline sector, but don’t like to buy airline stocks themselves. They are allergic to companies with a massive inventory of depreciating fixed assets like aircraft. Amadeus, on the other hand, delivers the software to airlines that supports their sophisticated ticketing and real-time seat allocation requirements, providing the exposure to new growth dynamics in travel.
The trust also avoids some other favourite sectors of smaller investors, like the cruise liners and defence stocks, again because they don’t meet those rich cash flow requirements.
Another stock Harries raves about is Nintendo: the games company also had a strong year. “We have long been enthused by the increasing desire of the company to monetise its incredible intellectual property both via gaming but also films and theme parks,” Harries said.
The single biggest contributor to STS Global’s overall performance in the last 12 months was the trust’s holding in Microsoft. The core Microsoft Office and Azure businesses are showing strong revenue growth. Another portfolio beneficiary of the current AI phenomena is RELX which was the third best performer over the 12 months.
