- The managers hunt around the globe for companies with sustainable growth prospects and resilient dividends
- The managers are supported by a well-resourced and diverse team at Baillie Gifford
- The trust has a proven track record of year-on-year dividend growth, having increased its pay-out for 49 consecutive years
How it fits in a portfolio
Founded in 1873, The Scottish American Investment Company (SAINTS) is one of the oldest investment trusts around. The managers search globally for companies with the potential for sustainable growth and a reliable dividend. The aim is to grow income and capital over the long term by primarily investing in company shares, but they also invest in other assets such as property, infrastructure, and bonds. Given its growth bias it could work well alongside ‘value’ funds or investment trusts investing in unloved companies to form part of an income focused portfolio.
Investors in investment trusts should be aware the trust can trade at a discount or premium to net asset value (NAV).
Manager
James Dow and Toby Ross have been joint lead managers of the trust since August 2017, having served as deputy managers since July 2016. Both have spent their entire investment careers at Baillie Gifford after joining its graduate scheme. Prior to their current positions, Dow spent time covering US companies while Ross focused on the UK.
Together they lead the Global Income Growth Team and manage the Baillie Gifford Global Income Growth fund, an open-ended fund that invests in a similar way to this trust but doesn’t have the ability to invest in unquoted companies or borrow to invest, known as ‘gearing’. Dow is also co-manager of the Baillie Gifford Sustainable Income fund and Ross forms part of the International Alpha Portfolio Construction Group. Given the overlap in their process and approach, we think they can comfortably handle these responsibilities.
The duo work very closely with Ross Mathison who was named co-manager on their near identical open-ended fund at the start of 2022. Mathison joined Baillie Gifford in 2019 having previously worked at Aviva and Standard Life covering European and global equities.
The managers are supported by a team of four analysts alongside a dedicated Environment, Social and Governance (ESG) analyst and investment researcher. They also benefit from the wider resource available at Baillie Gifford which consists of over 100 investment professionals.
Process
SAINTS has all the hallmarks of a Baillie Gifford portfolio, unconstrained with a focus on growth over the longer term. Dow and Ross require companies to demonstrate two key traits: a dependable income stream and the potential for above inflation profit growth. These companies need to demonstrate resilience through the economic cycle. This leads them to be very selective and only those companies they consider to be ‘exceptional’ make the cut.
To identify opportunities, they focus on bottom-up analysis (looking at individual company prospects) using a combination of quantitative and qualitative factors. Each company must pass their nine-question framework which focuses on understanding the drivers of growth and the reliability of the dividend. Meeting with company management is a crucial part of this process and it allows them to gauge the attitude towards paying a dividend to shareholders. If a company cuts its dividend, the managers review the investment, but this doesn’t necessarily mean it will be sold. Each company is assessed on a case-by-case basis and the managers acknowledge that dividend cuts can be prudent for long-term growth, for example to fund the acquisition of another business.
This analysis whittles a universe of around 4,500 into a portfolio of between 50-100 holdings. At the end of March, they held 85 holdings. The trust is split into four areas looking for different drivers of free cash flow - cash available to the business after expenses have been paid.
‘Compounding machines’ form the bedrock of the trust and consists of quality companies with strong balance sheets, barriers to entry from competition and experienced management teams. Companies like Nestlé, Microsoft and McDonald’s fit in this bucket. The managers like companies with an ‘exceptional revenue opportunity’, these tend to be market leaders with pricing power (the ability to raise prices without affecting demand) offering the potential for quicker growth. The remaining areas focus on longer-term free cash flow growth, looking for companies with a catalyst for positive change. Companies that possess these qualities can be hard to find, but by investing globally the managers give themselves the best opportunity to seek them out.
The managers keep the trust diversified by investing across different regions. The largest investments are in developed markets like the US and Europe but exposure to Asia also accounted for around 12% of the trust at the end of April 2023. The managers also invest in emerging markets which adds risk.
Recent additions to the trust include Intuit who make software for small businesses and consumers. The idea came after positive reports from other companies who had praised the management team. After investigating the team found the core products are accounting and consumer tax filing software. The management team plan on expanding their product range into areas such as payroll and HR giving small businesses a one-stop shop for managing their affairs. They also invested in Cognex, a leader in machine vision technology. The team believe the company has a high growth potential as businesses around the world try to automate repetitive, costly tasks such as checking labels in logistics, and scanning for faults in manufacturing.
In contrast, they sold CH Robinson whose core business is broking of truck transportation in the US. It was expected that the business would see strong demand however, they did not account for a large amount of new competitors writing business at low prices to gain customers and take market share away from CH Robinson. Other sales included Hiscox, Kimberly-Clark de Mexico and Haleon.
The trust also invests in a portfolio of UK commercial property managed by OLIM Property Limited and some global bonds, which includes riskier high yield and emerging market bonds. More recently they have also set up a small infrastructure equities portfolio to help diversify the income stream and deliver growth in excess of inflation. These investments are made with borrowed money with the intention of increasing returns (known as gearing), but this could magnify losses in a falling market and increases risk. Gearing at the end of 2022 was 11%.
The managers can also use derivatives, which if used adds risk. The investment trust structure gives them the flexibility to also invest in higher-risk unlisted companies, but they do not anticipate doing so for the foreseeable future.
Culture
This trust is managed by Baillie Gifford, an independent private partnership founded in 1908. It’s owned by partners who work full time at the firm. This ownership structure means senior managers have a vested interest in the company, and its funds and investment trusts, performing well. We think this has helped cultivate a culture with a long-term focus, where investors' interests are at the centre of decision making. We also like that managers are incentivised in a way that aligns their interests with those of long-term investors and should retain talented managers.
ESG Integration
All of Baillie Gifford’s funds are run with a long-term investment horizon in mind – they see themselves as long-term owners of a business, not short-term renters. So, assessing whether society will support, or at the very least, tolerate, the business model over the long term, and whether management will act as good stewards of shareholders’ capital is an important part of the investment process. Dedicated ESG analysts sit with and report into their respective investment teams, and the firm’s ESG efforts are supported by a dedicated climate specialist team, an ESG Services team (responsible for voting operations and ESG data) and an ESG Client team (responsible for ESG-related client communications). Individual investment teams are responsible for voting and engagement for the companies they invest in. Investment in controversial weapons is prohibited across the firm.
The firm reports all its voting decisions and provides rationale in situations where it voted against management or abstained, in a detailed quarterly voting report. There is also a quarterly engagement report which details the companies engaged with, and the topic discussed, and further engagement case studies are available on the website. All this information is brought together in the firm’s annual Stewardship Activities report.
We are comfortable that ESG risks are considered suitably at Baillie Gifford. However this trust does not have a specific ESG or responsible investing remit, meaning that it has the option to invest in companies that are considered ESG sinners.
Cost
The net ongoing annual charge is 1.02%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 p.a. for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.
Investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.
Performance
The managers have done a good job of outperforming their benchmark over the past five years (to end of April 2023). Over this period the trust’s share price has increased 67.34% vs 57.28% for the FTSE All-World. It has also exceeded the AIC Global Equity Income peer group return of 21.01%* over the same period. The trust’s net asset value (NAV) has increased 75.59% over this period. Remember that past performance is not a guide to the future.
This was also the case over the trust’s past financial year. To the end of December 2022, the trust’s share price fell -3.48% vs -7.30% for the FTSE All-World. The AIC Global Equity Income peer group fell -10.47%. The trust’s NAV fell -3.66% in 2022. One of the trust’s top performers was Novo Nordisk, the pharmaceutical company who saw success in developing treatments to tackle obesity with appetite suppressants. Future earnings growth from this innovation could be considerable and the share price has risen accordingly. Other notable performers included electronic test and measurement systems software company, National Instrument and semiconductor company Analog Devices.
It was a great period for their infrastructure investments which returned 3.90% over the past financial year. Cashflows in the infrastructure space were very robust in 2022 and led to share prices being relatively stable. The trust’s property portfolio returned -1.70% over the past financial year. Despite the portfolio being fully let, rising interest rates adversely affected property valuations.
The total dividend per share for the year to 31 December 2022 was 13.82p, which is a 9% increase on the previous 12-month period. This means the trust has increased its dividend for the forty-ninth year in a row and is an AIC Dividend Hero. At the time of writing the trust trades at a 0.39% premium to NAV and has a dividend yield of 2.58%, although remember yields are variable and aren’t a reliable indicator of future income.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| Apr 18 – Apr 19 | Apr 19 – Apr 20 | Apr 20 – Apr 21 | Apr 21 – Apr 22 | Apr 22 – Apr 23 | |
| Scottish American Investment | 11.32% | 0.65% | 31.41% | 4.55% | 8.70% |
| FTSE All World | 11.26% | -1.29% | 33.40% | 4.76% | 2.48% |
| AIC Investment Trust - Global Equity Income | 5.24% | -10.46% | 31.62% | 0.79% | -3.19% |
Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2023
FIND OUT MORE ABOUT SCOTTISH AMERICAN INVESTMENT COMPANY INCLUDING CHARGES
VIEW SCOTTISH AMERICAN INVESTMENT COMPANY PLC KEY INFORMATION DOCUMENT
This trust has a holding in Hargreaves Lansdown PLC.
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