Scottish Investment Trust Plc, an Edinburgh-based fund that has endured at least six stock market collapses since it started in 1887, is keeping more than 150 million pounds ($236 million) in cash in anticipation that prices will sink over the next year.
The 708 million-pound fund had three times as much cash on Oct. 31 as it did a year before, totaling about a quarter of its shareholder funds, manager John Kennedy said. He raised the money by selling shares in companies including Apple (AAPL) Inc., Atlas Copco AB (ATCOA) and Schneider Electrics SA because of concern about the effects of the European debt crisis.
“We will go investing with our money if we get a major correction,” Kennedy, who has run the fund since Jan. 1, 2004, said in an interview at his office in the Scottish capital. “In the region of 20 percent down from here will be a buying sign.”
Scottish Investment Trust is Scotland’s largest self- managed closed-end fund and was set up 124 years ago to find value investments in the Americas and former British colonies. Kennedy’s cash strategy contrasts with two larger, similar funds in Edinburgh managed by Baillie Gifford & Co. and Aberdeen Asset Management Plc, one with worse performance and one with better over the past 12 months.
As well as using money raised from selling the fund to investors, the trusts can borrow to increase the capital they have to deploy in the market.
Scottish Investment Trust’s assets at Oct. 31, the end of its financial year, included a 106 million-pound bond, according to the fund’s last annual report. Excluding cash, its holdings equated to 90 percent of net assets compared with 109 percent a year earlier, according to Kennedy. The fund is scheduled to report its full-year results tomorrow.
Baillie Gifford’s Scottish Mortgage Trust Plc (SMT), which has 2.3 billion pounds of assets, was 119 percent invested at the end of October, according to a statement on its website. Cash represented 0.9 percent of its assets at Sept. 30, up from 0.6 percent six months earlier, according to its half-yearly report.
Aberdeen’s Murray International Trust Plc (MYI), which has 1.1 billion pounds of assets, was 118 percent invested at the end of October, according to a monthly report on its website. The trust has “negligible” cash holdings, according to Bruce Stout, who manages the fund.
Over the past year, Scottish Investment Trust investors have had a negative return of 6.2 percent including dividend payouts. That ranks the trust 17th of 33 comparable funds in the period, which on average had a negative return of 4.6 percent, according to research firm Morningstar Inc. Scottish Mortgage Trust returned a negative 6.6 percent, while Murray International Trust had a total return of 1.6 percent.
It’s only the second time in “decades” that Scottish Investment Trust has been less than 100 percent invested, Kennedy said. The first time was in 2008 following the collapse of Lehman Brothers Holdings Inc.
The trust has reduced its holding or sold its interest in Komatsu Ltd., the world’s second-largest construction machinery maker, Atlas Copco, the world’s largest maker of air compressors, and Schneider Electrics (SU), the world’s biggest maker of low- and medium-voltage equipment. Each stock is down more than 20 percent this year.
Kennedy also cut his stake in Apple, the fund’s largest holding. It accounted for 2.9 percent of assets at the end of October, according to the trust’s factsheet.
“It’s pretty obvious why we are exceedingly cautious,” Kennedy, 48, said on Nov. 8. “There are all sorts of possible outcomes and we are trying to preserve capital. Our investors really detest losing capital.”
Kennedy, who has worked for the fund since 1992, said corporate profits as a proportion of gross domestic product are at levels that are “seldom good to be invested.”
There may be a “tipping point” that sends bond yields higher and causes a “severe reverse” in equity markets, said Kennedy. He declined to be more specific.
The sovereign debt issues roiling European bond markets and banks means the fund has “very little” invested in European financial stocks, Kennedy said.
“They are almost uninvestable in Europe, you don’t know what their assets are worth,” he said. “Our job is to make sure investors can invest safely, and we are looking for clues for when it is safe to go back into the water.”
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