A defensive contrarian investment trust to add to your watch list

John Stepek picks a defensive, well-diversified investment trust that should be able to ride out a market storm better than most.


Scottish Investment Trust holds companies, such as Tesco, where things are looking up but the market hasn't quite recognised it
(Image credit: © 2015 Bloomberg Finance LP)

Earlier this week, I mentioned the idea of a watch list.

It's a list of stocks (or other assets) that you would quite like to buy, but that aren't quite cheap enough yet.

The idea is to build the list up so that when a panic comes around (as it did on Monday), you have a good idea of what you want to buy if the sell-off gives you the chance to pile in.

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Well, today, I've got an idea for a fund you might want to add to your list...

It isn't easy being a genuine contrarian


Scottish Investment Trust (



has been around for a long time since 1887, in fact.

It's a global investment trust. For those who are unfamiliar with investment trusts, that just means that it's a company that invests in other companies another type of fund, in other words.

We tend to prefer investment trusts to other types of fund at MoneyWeek. The structure means that managers can take a longer-term view (because you are buying shares in the trust itself, the value can move around independently of the value of the underlying portfolio, which means the manager is never forced to sell good assets because of a short-term market panic).

Over and above that, they also tend to be cheaper to run (though not always) and history suggests that they tend to do a better job of beating the market than their open-ended fund rivals.

Anyway, current manager Alasdair McKinnon has been in charge for three years now. He prides himself on taking a contrarian approach to picking global stocks.

Now, fund managers are always describing themselves as contrarians. Then you look under the bonnet, and it usually means that they just own a bit less Amazon than everyone else does.

However, McKinnon does appear to walk the walk. The portfolio is relatively concentrated, holding around 50-odd stocks. The favoured sectors are clearly those that have been out of favour with the rest of the market energy and financials accounted for around a third of the fund between them as of the end of January. And there's nary a whiff of FAANG (expensive tech stocks) about it.

His overall contrarian thesis will no doubt be familiar to you. Human beings have evolved to run with the crowd it's a survival instinct that makes sense in lots of circumstances. But it's not so helpful when you're investing.

Markets get too optimistic when they're going up, and too pessimistic when they're on the way down. So by stepping back from the emotional over-reactions of the market, you can bag yourself a bargain by snapping up unjustifiably cheap stocks (and also avoid coming a cropper by avoiding hysterically overpriced ones).

It's a good theory. It's similar to the way MoneyWeek thinks. But how does it work in practice?

Ugly ducklings and turnaround tales

The answer so far is not bad. Over the past three years, the fund has returned around 50%, a little more than the underlying portfolio has advanced. That's roughly on a par with the MSCI All Country World index, but that's during a period when McKinnon's style value-ish, certainly not momentum-focused has been very much out of fashion.

And in the meantime, he's trimmed the fund's holdings and at the end of last year, jacked up the dividend yield substantially. So overall, it's a creditable performance.

McKinnon splits the stocks the trust owns into three categories. As per the contrarian label, there's the "ugly ducklings", which are the stocks that are cheap and disliked. So you have a healthy dollop of something like Marks & Spencer, which is still waiting for new boss Archie Norman to sprinkle his turnaround magic on the rather complacent retailer.

Then there are turnaround stories (what McKinnon calls "change is afoot"). These are companies where things are looking up but the market hasn't quite recognised it or remains wary. Tesco, with its improving fortunes, is a good example here.

Finally, there's the "more to come" category, which covers that tricky area of contrarian investing whereby the stock you bought because it was cheap has done exactly what you hoped it would, and is now neither cheap nor contrarian but you think it's going to keep going up.

The prime example here is Australian wine producer Treasury Wine Estates. The stock has more than trebled since the trust first bought it, and the trust has taken some profits, but it still owns some.

What caught my eye is that McKinnon has also been building a position in some of the big gold miners. His view is that people will always see gold as having some value, and that the miners have got their act together somewhat following the huge bear market. So there's scope for more gains there.

Don't get me wrong I'm not itching to put more money to work in the market right now. Rising bond yields are not going to give the market an easy ride over the coming months I suspect.

However, Scottish Investment Trust strikes me as the sort of slightly defensive, well-diversified trust that would ride out a market storm better than most, and it has a well articulated strategy that should pay out over the long run as long the managers can stick to it.

It's on a reasonable dividend yield of around 2.5%. And the discount is sitting at around 9%, so there's scope for that to narrow. It's cheap too, with an ongoing charge of less than 0.5%. Overall, I feel there will be opportunities to pick up decent assets cheaply this year, and this is one I'll be adding to my watch list.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.