Investment Trusts: Scotland looks East and West to ensure success: Paul Durman tracks the performance of a Dundee-based firm willing to go the distance in pursuit of profits

UNTIL recently, the stable of investment trusts managed by Dunedin had remained unchanged for many years. But after the recent launch of the pounds 20m Dunedin Japan Investment Trust, the firm is working on other ideas to breathe new life into its trust business.

Dunedin is the largest Scottish manager of investment trusts. The launch of Dunedin Japan has given it six investment trusts with combined funds of pounds 1.7bn. The flagship is the pounds 1bn Edinburgh Investment Trust, an international general fund.

Although the origins of the group extend back to 1873, Dunedin itself was formed only eight years ago from a merger between the managers of Edinburgh and the managers of the Dundee stable of trusts. These include Dunedin Income Growth (Digit), which is the oldest Scottish investment trust. The Bank of Scotland took a 50.5 per cent stake in the firm in 1989. The balance is owned by the investment trusts.

An important addition to the Dunedin team was last year's appointment of Hamish Leslie Melville, a merchant banker who founded Enskilda Securities and who was previously chairman of Capel-Cure Myers Capital Management. Since taking over as chairman, he has introduced clearer reporting lines and defined responsibilities, moving the firm away from the committee-based culture it retained from its days as a partnership.

The result, Mr Leslie Melville says, is that ideas are more liable to 'bubble up' and staff are more confident about making suggestions. He cites as an example the very heavy gilt buying and borrowing the firm did last autumn around the time of the pound's exit from the European exchange rate mechanism. 'That has proved to be a very correct decision.'

Dunedin is also looking at new ways of financing investment trusts, paying particular attention to the liability side of the balance sheet. It intends to go public with its plans shortly.

Alan Kemp, deputy chief executive, is extravagant in his praise for Mr Leslie Melville. 'He's made a hell of a difference - not to the way we manage money but the way the firm runs. He's a superb motivator.'

The performance of the investment trusts has been patchy in recent years. Dundee & London, a trust investing in listed companies valued at less than pounds 75m, had a particularly difficult time as the recession cut a swath through the ranks of smaller companies.

However, the investment results of its Japanese unit trust have been exceptional. This played a large part in Dunedin's decision to launch a Japan investment trust. The launch also recognised that there were only six UK trusts investing in Japan - a mere pounds 600m of assets in one of the world's largest markets.

Dunedin's detractors often point to Diadem, a proprietary computer software package the firm uses to home in on potential investments. Two years ago, Diadem famously failed to spot the attractions, during the depths of recession, of the large pharmaceutical stocks such as Glaxo and retailers such as Marks & Spencer and Sainsbury. This led Dunedin to underperform compared with its peers substantially during 1991.

'Our problem was that the recession was much worse than expected,' Mr Kemp explains. 'We underestimated the fall in earnings. We were applying a disciplined approach which said Glaxo was grossly over-priced. A very small number of stocks made a huge difference to our performance.'

Mr Kemp is anxious to dispel the image of Dunedin as a 'black box manager'. Diadem is not magic, he says, just a useful tool in the investment management process.

Dunedin has 9,000 companies on its worldwide database. Diadem allows Dunedin's managers to isolate a more manageable selection of companies that meet its strict investment criteria. Two of the most important are a low price-earnings ratio and a low price-book value.

The computer might eliminate 8,000 of the possible stocks, producing a list of apparently attractive investments in world markets. Dunedin must then exercise its skill, choosing between this still large selection.

With its main office in Dundee, Dunedin's costs are the envy of many competitors. Mr Leslie Melville says the firm's pretax profits as a percentage of revenue are twice the average of its competitors.

Dunedin's big success in recent years has been in North America. After a slow start, the firm has won substantial US pension fund business. This now makes up some pounds 800m of its almost pounds 4bn under management. The prospects in the US are enormous. US pension funds have traditionally restricted their holdings to their domestic market. But in recent years, they have started to look further afield and place some money overseas. It is estimated that nearly dollars 150bn is invested in international markets and rapid growthis expected. This is the business that Dunedin and other UK managers are so keen to get a slice of.

(Photographs omitted)