Keystone (KIT) is managed by James Goldstone, who aims to generate long-term total returns with a valuation-based approach to buying UK equities. James aims to identify companies which are undervalued due to investor sentiment or past troubles and hold them while their valuations revert to fairer levels. The attention he pays to the dividends on his portfolio companies, due to the implications they have for cash generation, management discipline and concerns for shareholders, means the yield tends to be higher than the typical growth fund. It is currently yielding 3.6%, which compares to the 4% average for the AIC UK Equity Income sector, despite the trust not specifically aiming for income. The trust has moved to a quarterly dividend, starting from the second half of the 2019 financial year, making it potentially more attractive to income investors. James, who took over the portfolio in April 2017, believes the major area of undervaluation in the market since he took over has been and continues to be in companies with UK domestic earnings. In his view, the valuations on companies dependent on the UK economy have become irrational due to ongoing uncertainty around the terms of our exit from the EU and the economic consequences. He has balanced this exposure to UK earnings with positions in international earners which are undervalued for different reasons, for example oil and gas companies. Just under 7% of the trust is also invested in gold mining companies, predominantly listed in North America, which should offer downside protection. He also holds a weighting in mid and small-cap growth companies, which he believes more than justify their current multiples. The weighting to UK earnings has meant the trust has underperformed in recent years, as any resolution to the Brexit negotiations has been postponed and the uncertainty prolonged. The trust now languishes on one of the widest discounts in the sector at 13%. James believes that when investors’ attention returns to fundamentals, there is significant outperformance potential in the portfolio.
