Why I've been buying Shell shares, by manager with a 4 per cent yield

lan Borrows, manager of the Seneca Global Income and Growth Investment trust, a multi-asset fund that is the absolute best performing trust in the AIC Global Equity Income sector over the past five years, has revealed the reasons why he bought shares in oil major Royal Dutch Shell over the past year.

 Why I've been buying Shell shares, by manager with a 4 per cent yield


The Seneca Global Income and Growth Trust has returned 62 per cent over the past five years, compared to 46 per cent for the sector average. The trust has a yield of just over 4 per cent.

Borrows commented that the trends currently displayed in financial markets, , ‘with equities struggling, safe haven bonds continuing their relentless advance, and commodities such as oil and industrial metals posting sharp declines’ typically indicates world where concerns about economic growth are rife. He continued, ‘ These concerns centred on China, where GDP growth continued to fall, but by no means exclusively so.’

Read more: Why I continue to be cautious on US equities, by Seneca manager

He added that with growth slowing in the US and China, the world’s largest economies, such concerns are valid.

Borrows continued, ‘The weakness in China may well have been responsible for the sharp fall in the prices of industrial metals such as Copper and Aluminium, down 21 and 13 per cent respectively over the period. However, the continuation in the fall in the oil price was as much to do with supply side issues – specifically, the inability of OPEC countries to reach an agreement on limiting production – as weak demand from oil importing countries such as China. Gold bucked the trend somewhat, but then this is often the case –industrial metals and energy prices tend to go up when demand is strong, while gold often goes up when demand is weak, and thus expectations of central bank stimulus rise.’

The fund manager has responded to the market conditions prevalent in the early part of this year by increasing the trust’s exposure to UK equities, which now account for around a third of the capital employed.  

He bought shares in oil major Royal Dutch Shell in January. Borrows commented that the stock,  ‘had reached very depressed levels in January, with a yield of 10 per cent and a share price that appeared to be discounting ever lower levels of oil prices in the future. However, this investment is atypical of others we make where we would expect to invest for at least three years. The time horizon for the investment in Royal Dutch is somewhat shorter, as we have some reservations as to the medium term prospects for the oil sector.’

Borrows also invested in BT, and Marks and Spencer from amongst the FTSE 100.

But overall he sees more value in the mid cap part of the market, remarking that companies there are ‘less researched’ than some in the FTSE 100.

He added, ‘Several opportunities were identified to invest in companies we felt were offering good value and which gave the prospect of being re-rated. The market volatility in January and February was particularly productive in that it provided several opportunities to invest in companies we had been monitoring for some time but had felt were too expensive.Several of the mid-cap holdings introduced to the Trust were in the financial sector, namely Arrow Global, Ashmore Group, and International Personal Finance. Another productive area was in the industrial sectors where investor concerns over global growth led to a significant de-rating of many companies. In this area we added new positions in Diploma, Morgan Advanced Materials, Senior and Victrex. In addition, Bovis Homes was acquired using the proceeds of the Barratt Developments sale, with Bovis valued on a significant discount to its larger competitor.’

Read more: JP Morgan: Why investors should expect the oil price to rise

The Seneca Global Income and Growth Trust returned 11 per cent in 2015, compared to just over 1 per cent for the sector average.

The Trust trades at par value to its net assets.

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