Securities Trust of Scotland

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1 Investment Trust Review 22 November 21 Securities Trust of Scotland 12 Months Ending Total Share Return* (%) Total NAV Return* (%) Securities Trust of Scotland (STS) is an income trust that pays quarterly dividends and currently offers a 4.4% yield. During the last twelve months STS has outperformed its benchmark, the, by 7.2% and 4.% in terms of share price and NAV total return respectively. With the announcement of its recent interim results we believe STS is in line to maintain its dividend for the year ending 31 March 211. Following 29 s dividend cuts, 21 has seen good underlying growth in dividends which the manager expects to continue. The manager believes that, on a 12-month view, UK equities represent good value. Investment strategy: High yield FTSE All-Share co. s STS is managed using a predominantly bottom-up investment style supported by macro analysis. There are no formal sector, stock or market capitalisation restrictions, on investments, and the trust maintains a relatively focused portfolio of between 45 and 6 stocks. STS has a significant income requirement and to help meet its dividend objectives, the manager looks to invest mainly in higher-yielding FTSE All-Share companies while employing a moderate level of gearing, 12.5% as at 31 October, to enhance returns over the longer term. With an increasing proportion of income derived from overseas earnings, it is now policy to hedge, on a rolling basis, 75% of foreign currency-denominated income back into sterling. Sector outlook: Dividend growth expected to continue The manager believes the UK will avoid a double dip recession. UK economic growth has exceeded expectations in 21 and interest rates are expected to remain low. Following the dividend cuts that were prevalent in 29, 21 has seen dividends return with strength and the manager expects this will continue. Reduced indebtedness and cost cutting has helped drive improvements in corporate profitability and the manager expects corporate activity to increase as strong companies, with access to finance, look for effective ways to deploy surplus cash. Valuation: Discount above long term averages Total Return Benchmark* (%) 17/11/7 (1.8) /11/8 (34.8) (39.) (33.4) 17/11/ /11/ Note: *12 month rolling discrete performance. Investment summary: Regular income with a good yield The current discount of 5.5% is below its three and five year averages of 5.9% and 6.3% respectively. Despite this, the yield is compelling and, as such, STS may be attractive to investors looking for regular income at an attractive yield, or those looking for a moderately geared exposure to the FTSE All-Share. Price 15.25p Market Cap 16.1m AUM 128.3m NAV p* Discount to NAV (5.5%)* NAV p** Discount to NAV (7.2%)** Yield 4.4% *Excluding income, as at 19 November 21. **Including income, as at 19 November 21. Share price/discount graph Dec/9 Feb/1 Apr/1 Jun/1 Aug/1 Oct/1 STS LN Equity Discount 3-year cumulative performance graph Nov/7 Feb/8 May/8 Aug/8 Nov/8 Feb/9 May/9 Aug/9 Feb/1 Aug/ STS LN Equity Share details Code STS AIC Sector UK Growth & Income Shares in issue.8m Price 52 week High Low Price 17.25p 86.75p NAV* p 92.56p *Excluding income Analyst Matthew Read mread@edisoninvestmentresearch.co.uk Securities Trust of Scotland is a research client of Edison Investment Research Limited

2 2 Edison Investment Research Investment Trust Review Securities Trust of Scotland 22 November 21 Exhibit 1: Trust at a glance Investment objective and fund background The investment objective of the company is to provide rising income and longterm capital growth through a balanced portfolio of UK investments. Performance is measured against the FTSE All-Share index. Developments last quarter 11 November 21: Interim results for 6 months ending 3 September 21 announced. 3 September 21: Half year-end. 3 September 21: 1st quarterly div. of 1.15p paid. Forthcoming Capital structure Fund details AGM July 211 Total expense ratio.8% Group Martin Currie Inv. Mgmt. Ltd. Preliminary May 211 Net Gearing 12.5% Manager Ross Watson Year end 31 March Annual mgmt fee See pg 7 Address Saltire Court, 2 Castle Terrace, Dividend paid Quarterly Performance fee See pg 7 Edinburgh EH1 2ES Launch date June 25 Trust life Indefinite Phone Wind-up date See pg 7 Loan facilities See pg 7 Dividend policy and history Quarterly dividends paid in March, June, September and December. Share buyback policy and history Renewed annually, the trust has authority to purchase up to 14.99%, and allot up to 5% of issued share capital DPS (p) Dec/9 Feb/1 Apr/1 Jun/1 Aug/1 Oct/1 Ordinary Dividends Special Dividends Repurchases ('s) Total cost ( m) Shareholder base (as at 3 September 21) Geographic distribution of portfolio (as at 31 October 21) Retail (79.4%) Pensions (7.2%) Insurance (5.8%) Trading (3.7%) UK (95.7%) Fixed Interest (3.3%) Cash (1.%) Mutual Funds (2.4%) Charities (1.5%) Portfolio composition (as at 31 October 21) Portfolio composition (as at 3 April 21) Royal Dutch Shell (6.3%) BAT (5.2%) BP (5.2%) Vodafone (4.8%) BHP Billiton (4.%) GlaxoSmithKline (3.9%) HSBC Holdings (3.2%) AstraZeneca (2.8%) National Grid (2.6%) Imperial Tobacco (2.3%) Other Quoted (55.5%) Fixed Interest (3.3%) Cash (1.%) BP (7.5%) Royal Dutch Shell (6.7%) BAT (4.8%) Vodafone (4.4%) GlaxoSmithKline (4.2%) BHP Billiton (3.9%) HSBC Holdings (3.5%) Next (2.9%) AstraZeneca (2.7%) Barclays (2.7%) Other Quoted (52.2%) Fixed Interest (3.1%) Cash (1.4%) Source: Securities Trust of Scotland/Edison Investment Research

3 3 Edison Investment Research Investment Trust Review Securities Trust of Scotland 22 November 21 Exhibit 2: Trust overweight positions at a glance British American Tobacco Code: BATS LN Market Cap: 47,178.2m BATS LN Equity Div Yield (trailing 12 m ths) 4.87% Tobacco/Tobacco British American Tobacco (BATS) is a holding company that owns, directly or indirectly, investments in the numerous tobacco companies. BATs products are sold in approximately countries and its brand portfolio includes Dunhill, Kent, Lucky Strike and Pall Mall. The manager considers that BATS provides solid defensive earnings, has strong free cash flows, strong dividend growth and good cash flow yields. Elementis Code: ELM LN Market Cap: 467.9m ELM LN Equity Div Yield (trailing 12 m ths) 3.3% Chemicals/Specialty Chemicals Headquartered in the US, with operations in the US, Europe and Asia, Elementis (ELM) is a speciality chemicals company. The company is structured around two main business segments: Specialty Products and Surfactants. The manager considers that ELM is well managed. Management addressed issues early into the downturn and was able to hold the dividend. Despite the recent performance uplift, ELM remains at an attractive valuation. Melrose Code: MRO LN Market Cap: 1,367.9m MRO LN Equity Div Yield (trailing 12 m ths) 3.31% Ind l Engineering/Ind l Machinery Headquartered in the UK, Melrose (MRO) acquires underperforming industrial businesses and then invests to develop the companies operational and strategic strengths. Once a turnaround has been completed, MRO sells the businesses to return value to shareholders. The manager considers that MRO has performed well, raised the interim dividend by 38% and can generate substantial working capital benefits. Halfords Group Code: HFD LN Market Cap: 863.3m HFD LN Equity Div Yield (trailing 12 m ths) 5.2% General Retailers/Speciality Retailer UK Located in the UK, Halfords Group (HFD) is engaged in the retailing of automotive, leisure and cycling products. HFD has 438 stores in the UK, 22 stores in the Republic of Ireland and 6 stores in Eastern Europe. Although HFD appears to have run out of momentum recently, the manager considers HFD has provided defensive earnings and stable profitability and its yield remains compelling. Next Code: NXT LN Market Cap: 3,834.7m NXT LN equity Source: Thomson Datastream/Edison Investment Research Div Yield (trailing 12 m ths) 3.52% General Retailers/Apparel Retailers Next is a UK-based retailer of clothing, footwear, accessories and home products. It is organised around three main business segments. Next Retail, Next Directory and Next International. The fund manager considers Next to be a well managed, cash generative company with good dividend cover. Reflecting this, Next has regularly been an element of STS top five overweight positions.

4 4 Edison Investment Research Investment Trust Review Securities Trust of Scotland 22 November 21 Fund profile Launched in May 25, as a vehicle for holders of the previous Securities Trust of Scotland to roll their holding into, STS is an income trust that pays quarterly dividends. Ross Watson, a director of Martin Currie s investment team responsible for UK Growth & Income investments, has led the management of STS since its launch in 25. The fund manager: Ross Watson Manager s view The manager holds the view that, despite concerns of a double dip by many commentators, the UK economy is not about to fall back into recession. The UK economy has grown faster than expected in 21 and short term interest rates are expected to remain low. Gilt yields are discounting the governments plan to reduce the deficit, which the manager consider is falling against a backdrop of rising tax receipts. Dividend growth has returned, with a number of companies making dividend payments appreciably ahead of market expectations, which the manager considers to be evidence that companies are increasingly positive on the economic outlook. Levels of corporate indebtedness, as well as costs, have been reduced and, with demand picking up, corporate profitability is improving. The manager expects this will continue and that, for many UK companies, global economic growth will help offset potential weakness in the domestic market. The manager expects more corporate activity as strong companies, with access to cheap finance, look for efficient ways to deploy their surplus cash. The manager expects positive dividend announcements to continue and considers that, on a 12 month view, UK equities represent good value. Asset allocation Investment process STS is managed using a predominantly bottom-up investment approach, supported by macro analysis. The manager uses two key screens for stock selection. The first is Martin Currie s proprietary stock ranking system, The Dynamic Stock Matrix, which scores stocks on a range of factors considered fundamental to long-term share price performance. The second is the Core Screen Matrix which the manager uses to screen stocks on factors such as cash flow and dividend yields. This analysis is supported by a comprehensive programme of company meetings. When evaluating stocks for inclusion in the portfolio, the manager looks for: 1) High quality companies companies with strong balance sheets that are generating strong cash flows, as well as high calibre management with ownership stakes in the company. 2) Attractive valuations companies with good free cash flow yields, attractive P/E s and above average prospective yields. 3) Growth companies with good sales growth, attractive earnings growth and above average dividend growth. 4) Positive change companies where valuation consensus is missing, creating the opportunity for superior analysis to establish valuations that differ from the market. Overview As at 31 October 21, STS had 55 investments. The top 1 equity holdings account for 45.3% of net assets, fixed interest holdings for 3.7%, cash accounts for 1.1% and borrowings account -12.5%, with the remaining equity investments accounting for 62.4% of net assets. In total asset terms, the top ten holdings account for 4.3%, fixed interest accounts for 3.3%, cash accounts for 1.% and the

5 5 Edison Investment Research Investment Trust Review Securities Trust of Scotland 22 November 21 remaining holdings account for 55.5%. As displayed in Exhibit 3, STS s asset allocation has moderate differentials to those of the benchmark index, reflecting the actively managed nature of the trust. As shown in Exhibit 1, apart from the 3.3% and 1. % of total assets held as fixed interest and cash respectively, the remaining 95.7% is fully invested in the UK and as such the portfolio is sensitive to movements in the UK s economic climate. Underweights STS s basic materials underweight reflects a significant underweight in mining. STS has small underweights in technology, telecommunications, consumer services and oil & gas. Overweights STS s equity portfolio is overweight industrials, utilities, financials, consumer goods and healthcare. Within the financials overweight, STS has a significant underweight in banks.with the exception of healthcare and utilities, all are in cyclical areas and will benefit from an uplift in economic activity. Exhibit 3: Sector allocations of equity portfolio, as at 3 September 21 Trust Weight (%) Benchmark Weight (%) Trust Active Weight (%) Trust Weight/ Benchmark Weight Industrials Utilities Financials Consumer Goods Health Care Technology (.1).93 Telecommunications (.8).86 Consumer Services (1.8).82 Oil & Gas (3.3).8 Basic Materials (4.6).63 Total... Source: Securities Trust of Scotland/Edison Investment Research Current portfolio positioning By the their very nature, income focused portfolios tend to have a defensive bias however, the manager has provided some cyclical exposure through the industrials and financial overweights. Top holdings Exhibit 4: 1 largest equity holdings as at 31 October 21 Note: one-year total return performance to 17 November %. Holding % One year total return price performance (%) Performance relative to FTSE Index (%) Royal Dutch Shell B British American Tobacco BP 5.8 (24.7) (35.8 Vodafone Group BHP Billiton GlaxoSmithKline (5.9) HSBC Holdings (UK) 3.6 (7.7) (18.8) AstraZeneca National Grid (1.6) Imperial Tobacco Group (2.4) Total 45.3 Source: Thomson Datastream/Securities Trust of Scotland/Edison Investment Research During the past 12 months the benchmark index has risen 11.%. As Exhibit 4 shows, five out of STS s top 1 holdings have outperformed the index during this period.

6 6 Edison Investment Research Investment Trust Review Securities Trust of Scotland 22 November 21 Exhibit 5: Investment trust performance Recent performance Price, NAV & benchmark total return performance 1 year rebased Price, NAV & benchmark total return performance (%) Dec/9 Feb/1 Apr/1 Jun/1 Aug/1 Oct/1 STS LN Equity STS NAV Source: Thomson Datastream/Edison Investment Research -1 1 m 3 m 6 m 1 y 3 y 5 y Price Performance NAV Performance Benchmark Performance As Exhibit 5 illustrates, STS has outperformed its benchmark, in terms of NAV total return, over the six-months and one-year periods. In terms of price total return STS has outperformed its benchmark over the one-, three and six-month periods as well as the one-year period. It should also be noted that STS is predominantly held by private investors, as illustrated in Exhibit 1, many of whom are believed to hold it for its regular dividend and good yield. When compared to its peers in terms of dividend yield, STS ranks 11th out of 19, as shown in Exhibit 7. Discount Exhibit 6: Discount over three years Nov/7 Jan/8 Mar/8 May/8 Jul/8 Sep/8 Nov/8 Jan/9 Mar/9 May/9 Jul/9 Sep/9 Source: Edison Investment Research STS has the authority, renewed annually, to allot up to 5% or make market purchases of up to 14.99% of issued share capital, which provides the manager with a mechanism to influence the discount. Despite this authority, an explicit commitment to maintain the discount at a particular level has not been provided. However, the average discount during the last 12 weeks of the financial year needs to be below 7.5% to avoid triggering a redemption opportunity. As Exhibit 6, which shows the discount over the last three years, illustrates, the discount volatility increased substantially from September 28, arguably reflecting the prevailing financial climate. However this was not accompanies by the general widening seen elsewhere in the sector and during the last twelve months discount volatility has broadly decreased. During the same STS has traded at an average discount of 7.4% and within the range of 3.1% and 11.3%. As Exhibit 1 illustrates, STS has been active in the market for its own shares during the last 12 months, repurchasing 1.2m shares at a cost of 1.2m. All of these took place during the measurement period for the discount control mechanism, thus preventing the requirement to offer a redemption opportunity. The current discount

7 7 Edison Investment Research Investment Trust Review Securities Trust of Scotland 22 November 21 of 5.5% is below its longer-term averages of 5.9% and 6.3% over three- and five-year time horizons, respectively. Capital structure STS is a conventional investment trust, having only one class of share in issue 1p ords. The trust is able to gear up to 15% of total assets and reflecting this has an 18m loan facility with Lloyds Bank. As at 31 October 21, STS had borrowings equal to 12.5% of net assets. The management fee is calculated as.3% per annum of the company s net assets, payable quarterly in arrears. The manager is also entitled to a performance fee of.15% of net assets for each percentage point by which the percentage performance of the company s net asset value per share, adjusted for share buybacks, exceeds the percentage capital return of the FTSE All-Share index during the year. If the net asset value per share falls over the year, the share of any out-performance is reduced by 5%. The performance fee is subject to a cap of.75% of the year-end net assets. The manager is also entitled to a peer group performance fee based on the performance of STS s share price, in total return terms. The peer group is chosen by the company s board with advice from JPMorgan Cazenove and is reviewed at least annually. The manager receives a peer group performance fee of.25%,.1% or % of net assets, if STS s share price total return performance is 1st quartile, 2nd quartile or 3rd/4th quartile, respectively. The investment management and company secretarial agreements can be terminated immediately and without penalty if Martin Currie ceases to be capable of carrying out investment business. If the management and secretarial agreements are cancelled under any other circumstances, Martin Currie is entitled to compensation equal to twice the quarterly fee payable immediately prior to cancellation. The total expense ratio (TER) was.8% for the year ended 31 March 21 (.7% for the year ended 31 March 29). STS does not have a fixed life. However, if the average discount during the 12 weeks prior to the financial year end exceeds 7.5%, a redemption opportunity is triggered. Dividend policy and record Dividends are paid quarterly. The first interim dividend is paid in September ( p) which has historically established the level for the second and third interims in December and March respectively. This is typically followed by a larger final dividend in June (21 1.2p). For the year ending 31 March 21 STS paid a total dividend of 4.65p ( p). Part of STS s investment objective is to provide rising income and, as such, we would expect STS to aim to maintain, and where possible provide moderate increases in, its total dividend payment. STS s dividend payment history is illustrated in Exhibit saw a reduction in total year on year dividend of 14.7% to 4.65p. This was a result of the extensive dividend cuts witnessed for UK companies during the period. As at 31 March 29 STS had revenue reserves equal to 2.8m or 2.77p per share (on a weighted average basis). After payment of the final 2.p dividend this is equivalent to.77p per share or 14.2% of the total payment for the year. As at 31 March 21 STS had revenue reserves equal to 2.5m or 2.48p per share (on a weighted average basis). If the final dividend had been maintained at 2.p, this would have had the effect of reducing revenue reserves to.48p per share, or 8.8% of the total 5.45p payment for the year. The manager and board did not consider this to be sustainable. As a result of the cut, STS had revenue reserves as at 31 March 21, after payment of the final dividend of 1.2p, of 1.28p per share or 27.5% of the 4.65p dividend payment. The manager considers that the outlook for dividends has improved significantly, although the obvious exception is BP which has been a core STS holding. The manager expects BP will pay one dividend during the year to 31 March 211 and there will be a 3% reduction when dividends resume, which will reduce STS revenue income by c

8 8 Edison Investment Research Investment Trust Review Securities Trust of Scotland 22 November 21.5p per share to March 211. However, having entered the year with revenue reserves of 1.28p per share, we expect STS will at least be able to maintain the dividend for the year ending 31 March 211 at the 21 level. In terms of expense allocation, transaction costs relating to the purchase and sale of investments and associated exchange gains/losses are charged to the capital account. Management fees and interest payable are charged 35% and 65% to the revenue and capital accounts, respectively. The performance fee, where payable, is charged to the capital account. Peer group comparison As Exhibit 7 illustrates, the AIC sector UK Growth and Income is a comprehensive peer group with 19 constituents. Within this peer group, STS ranks 8th over a one-year period, 14th over a threeyear period and 13th over a five-year period when considering share price total return. Exhibit 7: UK growth and income sector, as at 17 November 21 Company Share price total return on Total 1 year 3 year 5 year Expense Ratio Disc/ Net Gearing Prem ( no gearing) 5 Year Dividend Growth (%) Div yield Sector average (.1) Securities Trust of Scotland (6.5) British & American (19.8) City of London Dunedin Income Growth (2.5) Edinburgh Investment F&C Capital & Income Finsbury Growth & Income (2.6) INVESCO Income Growth (8.7) JPMorgan Elect Managed Income (1.8) 98 (2.5) 4.3 Lowland (7.5) Merchants Trust Murray Income (1.7) Perpetual Income & Growth (2.) Schroder Income Growth (2.9) Shires Income (9.) 6.3 Standard Life Equity Income (2.9) Temple Bar Troy Income & Growth (1.1) 98 (18.6) 3.7 Value and Income (23.) Source: The Association of Investment Companies The board All directors are non-executive and independent of the manager. They are: Neil Donaldson (chairman), Rachel Beagles, Charles Berry, Andrew Irvine and Edward Murray (directors). 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