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Back in the middle of September I met with James Harries, who manages the STS Global Income & Growth investment trust, part of the independent boutique, and owner managed, Troy Asset Management.

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James invests in a concentrated portfolio of “Quality“ companies, those that have a high return on capital and strong cash flow. Since James took over the mandate in late 2020, his focus has been on growing the dividend, alongside long term capital growth.

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When we spoke, he was apologetic for the relevant underperformance compared to the MSCI World index which, as we know, has been dominated by AI companies. However, I told him that I was very comfortable with his approach, precisely because he held very little by way of tech companies. In fact, the only tech company he holds in the top 10 is Microsoft which makes up just 3.6% of the portfolio and this position had been reduced. Instead, his top companies include the more mundane, such as Canadian National Railways, Admiral Insurance, Texas Instruments, Reckitt Benckiser and Siemens, but ones that meet the quality moniker. New additions to the trust have been AIA, Asia’s leading insurance company and LVMH, the world’s largest luxury goods conglomerate.

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As I wrote not long ago in the piece titled, "Hiding in Plain Sight”, these companies fare well when markets rotate from one style to another. If everything went up together you would have little diversification and therefore little protection when one area of the market corrects. The aim of diversification is to reduce the volatility. The advantage of active management is that it allows the managers to be selective. In this case, the underlying companies held within the portfolio have an average price/earnings below that of the MSCI World index, greater cash flow, and both a higher operating margin and return of capital. Importantly for a trust seeking income, it has a significantly higher yield than the index. The dividend yield on the trust stands at 3.63% and has grown every year since James took over.

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It is reasonable to ask why we hold a fund when others have performed better, but different approaches succeed at different times. We retain a fund while we believe its prospects and role within a portfolio remain attractive so long as we can eventually justify this.

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The past four weeks has been such a time. The MSCI World Index, with around 30% allocated to technology, fell 3.29%, while the FTSE All-World Technology Index declined 15%. By contrast, STS Global Income & Growth rose 7.37%.

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I finish with a reminder from James Harries about some wise words that the former Chief Market Analyst at Merrill Lynch, Bob Farrell, made. He studied market trends and investor psychology, particularly about how fear, greed and crowd behaviour create extremes. The rules to remember are that;

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• Markets tend to return to the mean over time

• Excesses in one direction will lead to an opposite excess in the other direction

• Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

• Fear and greed are stronger than long term resolve

• When all the experts and forecast agree – something else is going to happen.

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“You can’t do the same thing others do and expect to outperform.” Howard Marks, Oaktree Capital Management

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Comments from James Scott-Hopkins, Founder of EXE Capital Management.

The views are those of the author only.

The above does not constitute a recommendation to buy the funds or specific assets and guidance should be sought from your adviser as to the suitability of the fund for your portfolio. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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