News & Views
We’re investing in ugly ducklings…
At the Scottish, we take a contrarian approach to global stock markets.
We are high-conviction investors and focus on stocks that are out of favour with mainstream investors, as we believe these offer the greatest potential for long-term gains. This is because popular stocks tend to be overvalued – while out-of-favour stocks are often too cheap. We aim to exploit this inefficiency for our shareholders.
The investment environment is inherently cyclical. We see cycles in industry fundamentals, corporate behaviour, analyst views and investor sentiment. These cycles are closely linked: when an industry’s fundamentals have been strong for some time, management teams, analysts and investors tend to be overly optimistic about its future. This leads to irrational investment decisions. Some of our best opportunities arise at the opposite point in the cycle – when a downturn leads to excessive pessimism about a company’s prospects. When this happens, we can buy stocks precisely when the profit opportunity is greatest.
An innovative investment approach
We believe investment returns are driven by a change in a company’s prospects and an accompanying change in market perceptions. Often good companies are overly admired and consequently become overvalued. A company that has been badly run or is down on its luck may offer much more potential for improvement and, eventually, for outstanding returns. As contrarian investors, we see three distinct investment categories.
We categorise the first as ugly ducklings – unloved companies that most investors shun. These firms face fundamental challenges, and the market has become extremely pessimistic about their prospects. But we see their out-of-favour status as an opportunity.
The second category is where change is afoot. These companies have made significant changes to their fundamentals, but the improvements are not yet recognised by the market. So, while other managers continue to steer clear, we see the potential for profit.
In the third category are companies that have more to come. Unlike the first two categories, these companies are generally recognised as good businesses but we see an opportunity as the market does not appreciate the scope for further improvement.
A painstaking process
To identify the right opportunities, we use a qualitative and quantitative analytic framework to research companies’ fundamental prospects. We carefully assess any management change and restructuring actions, and consider the likely extent of any earnings recovery.
Companies in our portfolio can move along an axis from “ugly ducklings” to “change is afoot” and then “more to come”. When ugly ducklings become fully fledged swans, we’re looking to sell. Until then, we keep portfolio turnover to a minimum.
Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.
The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.
Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.
Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this promotion should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.
This promotion is issued and approved by SIT Savings Limited.