 QE Is Good News
ALAN PORTER SAYS, "QE IS GOOD NEWS FOR EQUITY INVESTORS"
Quantitative easing, or money printing, by central banks provides a good backdrop for shares, says Alan Porter, manager of the Securities Trust of Scotland.
The stock market's initial enthusiasm for the US Federal Reserve's decision to launch 'QE3', or another big round of injecting new money into the US economy, shows just how much markets are being driven by macro concerns, although the rally did peter out this week.
Alan Porter, manager of the Securities Trust of Scotland, a global investment trust, says quantitative easing (QE) by central banks like the Fed, but also the Bank of England, the European Central Bank and the Bank of Japan, can create a great situation for investors in shares.
QE involves central banks creating new money and using it to buy government bonds and other assets with the aim of reducing long-term interest rates. Porter explains that this creates a scarcity of income as yields on the bonds and the assets that are purchased are pushed down as their prices rise.
This is good news for shares, or equities, because their higher dividend yields then look attractive to investors who buy them.
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Reasons To Be Cheerful
SECURITIES TRUST OF SCOTLAND: PORTER FINDS REASONS TO BE CHEERFUL
Securities Trust of Scotland manager Alan Porter says a stable US housing market, recovery in bank lending and healthy company balance sheets are reasons to have a positive outlook.
One year on, having taken over the Securities Trust of Scotland, investment trust manager Alan Porter has raised the trust's gearing level and its exposure to cyclicals as a sign of being more bullish on company prospects.
GLOBAL MANDATE
Porter took over STS on 1 August last year with the mandate of transforming the portfolio from a UK income fund to a global mandate. This followed a shareholder vote to change its investment objective from solely seeking income in the UK.
In December, when Fund Strategy last profiled the trust, the manager described himself as "getting close to being greedy but not quite there yet". At the time, his gearing level was 5 per cent and the fund was underweight in cyclicals as he felt they looked too expensive.
By February, Porter had upped his weighting in cyclicals to neutral while he has since raised the trust's gearing to 8 per cent as he believes the current macro economic environment is supportive for equities, in particular, income stocks.
"By the turn of the year, for the first time, we saw improving data coming out of the US and since then GDP has been growing at around the 2 per cent mark," he says. "While there has since been negative data, there are reasons to stay positive, namely stronger labour markets, stability in the housing market, good retail numbers and a recovery in bank lending."
INCREASING RETURN
Meanwhile, from a micro perspective, Porter notes companies are sitting on healthy balance sheets and profit margins are at all-time highs, which he says is good for income in the short to medium term.
"Companies are not investing this in terms of capital expenditure, instead opting to return it to shareholders, which is good news for income and growth funds as payout ratios rise," he says.
Indeed, as a result, Porter is expecting 7-8 per cent dividend per share growth for STS over the next 12 months.
STRONG PERFORMANCE
One year into the trust's new mandate and performance has been strong. According to the latest AIC data over one year to 31 July 2012, the trust has returned 17.8 per cent on a share price total return basis, outperforming its benchmark by 9 per cent. In the trust's last financial year, it also increased its dividend by 1.1 per cent to 4.70p per share and its current net yield is 3.7 per cent.
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