Designed to deliver income growth, time after time.
It’s often referred to as the holy grail of investing - and it’s precisely what SAINTS aims to deliver.
Demand for a regular, growing income that outstrips inflation has never been greater among private investors, who in recent years have seen cash returns ravaged by low interest rates.
The climate of low interest rates since the global financial crisis that started in 2007 has seen investors looking to a wide range of asset classes to generate an investment income.
All this could point to a greater role for equities. Whilst past performance is no guide to future performance, equities not only have a strong record of delivering total returns, some also have a strong record of growing income ahead of inflation.
And for investors looking to generate an income in retirement, it’s not just the level of income that matters, but also its dependability. People need to be confident that the growth in income from their pension investments will at least keep pace with inflation and continue to do so for as long as they need.
The income from equities is generally less certain than that from bonds, so the challenge is to find an avenue which enables those investors looking for income to invest not just in equities but in equities which will deliver a high, dependable and inflation-beating income stream.
The Scottish American Investment Company P.L.C. known as SAINTS, has an attractive dividend yield, and also aims to deliver dependable, inflation-beating dividends, principally by investing in companies which the manager believes have strong cashflows and good growth prospects.
SAINTS has been around since 1873, when it was founded to invest in North American railways. Its objectives have changed since then, but it’s never been more in tune with the needs of today’s investors. Today SAINTS is managed by Baillie Gifford, one of the UK’s largest investment trust managers.
The views and opinions expressed in this guide are not necessarily those of Baillie Gifford. They should not be taken as statements of fact, or used as a basis for making investment decisions. Where possible, Baillie Gifford has checked all references, facts and numbers in this guide.
This guide contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. This information has been issued and approved by Baillie Gifford Savings Management Limited (BGSM) and does not in any way constitute investment advice. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of seven investment trusts, including Scottish American Investment Company.
All data as at 31 March 2016 unless otherwise stated.
This guide was written by Jeff Salway, a freelance journalist who was previously The Scotsman’s Personal Finance Editor. Jeff continues to write the weekend personal finance pages for both The Scotsman and Scotland on Sunday and contributes to various other publications.
A FOCUS ON INCOME
SAINTS’ principal objective is to deliver above inflation dividend growth by investing primarily in global equities - you can see SAINTS’ dividend performance in the table and graph shown opposite. The Trust has grown its dividend every year for more than 35 years, giving it one of the longest income track records in the investment company universe.
Focusing on dividends - which are paid out every quarter - chimes with the needs of the Trust’s shareholders whilst its ‘bottom-up’ investment style focuses on individual companies regardless of sector, region or economic conditions.
Turnover is kept low, with the managers taking a long-term view on prospective holdings. These holdings are typically in quality, reasonably valued companies with a commitment to dividends and a business model supporting sustainable growth and earnings. Income on its own is rarely enough - the portfolio is built on a belief in the combination of income, growth and dependability.
SAINTS is benchmarked against the FTSE All World Index, but the portfolio composition isn’t constrained by that of the index. This means there are no restrictions on the maximum or minimum exposure to different industries or regions. The managers have the flexibility to adjust the balance of assets and holdings in response to changing opportunities and risks, subject to a limit of 15 per cent of total assets that can be exposed to individual companies.
The dependability of the dividends which the Trust pays is supported by its ability to use reserves set aside during the most productive periods to ensure the dividend can still be maintained in leaner years. This flexibility to set aside income for a rainy day is an advantage of investment trusts over other types of collective investment schemes.
This graph demonstrates how the SAINTS dividend compares with inflation rates. (figures rebased to 100 at 31 December 2004)
Source: Thomson Reuters Datastream.
Past performance is not a guide to future returns.
Source: Baillie Gifford & Co, data as at 31 December 2015.
The management of SAINTS is very much a collective effort. Working directly alongside lead manager Dominic Neary is a team including investment managers James Dow and Toby Ross who are supported by an investment analyst.
They are in turn supported by the full resources of Baillie Gifford, including the research resources of each investment team. It’s also important to note that the investment trust’s board of directors oversees SAINTS’ managers and the Trust’s strategic asset allocation.
Baillie Gifford’s culture of sharing information and encouraging debate is central to SAINTS’ investment process. Each week the management team studies their own and the firm’s wider research to identify potential investment opportunities and to review any research that may have implications for existing holdings.
The analysis concentrates on corporate characteristics supporting the combination of growth, income and dependability on which the investment strategy is based. In assessing different stocks, the managers zero in on four particularly critical factors: the company’s long-term earnings growth potential; income generation and dividend growth; the dependability of the income stream; and the total return potential.
So while a company may be selected on the basis of sound fundamentals – such as competitive advantage, financial strength and management – the nature of the Trust also requires some potential stocks to be judged on their ability to offer dividend growth. After discussing the most pertinent research the team members go away to weigh up whether there’s a need for some form of action, such as making a new investment or rebalancing an existing position. Action is only taken after a detailed discussion, where differing opinions are considered, and further research undertaken as appropriate.
Most of the equity holdings currently have an income stream that we believe is expected to grow at a rate outstripping inflation, they also have some level of dependability to their cashflows and dividends even in times of stress.
In illustrating and considering the portfolio, the managers find it useful to show a categorisation of the primary drivers of free cashflow growth, as well as showing stocks by position size and yield. The four categories which they use are:
Compounding Machines -
which they expect to deliver consistent above-average cashflow and dividend growth
Exceptional Revenue Opportunities -
which are typically market leaders with exceptional earnings and cashflow growth prospects
Profitability Transformation -
where cashflow and dividend growth are expected to improve markedly
Capital Decisions -
where strategic change is expected to lead to a structural increase in the cashflow available for dividends.
What will drive growth in free cash flow available for dividends?
Based on the SAINTS portfolio. Source: IBES, Bloomberg, Baillie Gifford. Holding sizes and forecast yields are as at 31st August 2015. Yields are calculated using market consensus estimates of ordinary dividends, on a 12 month forward basis, gross of withholding taxes. Excludes cash, weights have been rebalanced to 100%. Totals may not sum due to rounding.
About 3.5% of the portfolio is currently comprised of stocks yielding 6% p.a. or more, but the main income constituents, accounting for almost 50% of the equity holdings, are companies expected to yield between 3% and 5%.
Most of the holdings in this range are considered ‘compounding machines’, and amongst these are Partners Group and Coca- Cola, both of which embody certain characteristics that SAINTS looks for in its portfolio holdings.
Partners Group is a Swiss private market asset manager with a global and increasingly diversified reach. While the Trust typically avoids banks, asset managers are viewed more positively as they don’t require initial capital to operate and grow.
Coca-Cola is favoured largely due to the strength of its brand, good cash generation and yet also because it’s asset light. Crucially, its commitment to income has seen its dividends per share rise steadily for more than 30 years, although this should not be taken as a guide to future dividend payments.
While the bias in the equity portfolio is towards ‘high conviction’ stocks that demonstrate growth, income and dependability, there’s also a small basket of ‘high conviction’ stocks with little or no yield. These tend to be held for their expected revenue and profitability and offer future income potential which we expect to enhance capital and income growth over time.
There has to be a strong case for non-yielding stocks to be included however, with the managers needing to feel confident that they will produce strong returns on capital and eventually use their growing cashflows to initiate a dividend.
Another feature of the companies in which SAINTS invests is their geographical diversity. Europe, including the UK, and North America still account for the bulk of the portfolio, but SAINTS can also invest in stocks globally including stocks from countries such as Brazil, China, Thailand, Japan, South Korea and Taiwan.
The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.
In gaining exposure to such a diverse range of countries the Trust’s managers are able to tap into the resource of the firm’s expanded global income growth team. Details of asset allocation of total assets and the top ten equity holdings are shown on the following page.
There’s also a direct property element of the Trust’s portfolio, managed by OLIM. This typically steers clear of prime London real estate, focusing instead on non-prime property.
The Trust’s borrowings are typically invested opportunistically in property and bonds, with the net asset value of the Trust invested entirely in equities. Direct property investments, may be difficult to sell. Valuations of property are only estimates based on the valuer’s opinion. These estimates may not be achieved when the property is sold.
The Trust has some fixed income investments too, although the managers have reduced their exposure to bonds as the yields have fallen, having increased it during the financial crisis to take advantage of more attractive valuations.
The Trust can borrow money to make further investments (sometimes known as “gearing”). There is a risk in that when this money is repaid by the Trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the Trust will make a loss. If the Trust’s investments fall in value, any invested borrowings will increase the amount of this loss.
Top Ten Equity Holdings
Total may not sum due to rounding
Asset Allocation of Total Assets
Source: Baillie Gifford & Co, data as at 31 March 2016
The Trust’s approach and its main theme – long-term investing for a dependable and growing income – ensures that it’s well-positioned even during times of uncertainty that can result in share price volatility.
The current climate fits that description, with the economic recovery from the financial crisis potentially at risk from ongoing eurozone weakness, political instability and unexpected events such as volatile oil prices. Economic activity is expected to continue improving, but at a slow rate, with returns from financial markets being positive rather than exceptional.
But SAINTS has the potential to thrive even against this mixed backdrop. By identifying stocks believed to have strong balance sheets and cash flows that can support dividends and growth, we believe that the Trust will continue delivering income to investors, whatever the future brings.
The shares of SAINTS are listed on the stock market so they can be bought through a broker or by requesting an application pack from Baillie Gifford.
This will allow you to access SAINTS in various other ways, with an ISA and Children’s Savings Plan among the options.
The Baillie Gifford Investment Trust ISA offers access to SAINTS and to the other trusts Baillie Gifford manages with monthly savings starting from £100 or lump sum investments between £2,000 and the annual ISA allowance limit (£15,240 for the 2016/17 tax year). Those investing for children can invest through the Children’s Savings Plan, which accepts monthly payments from £25 or one-off investments starting at £100.
There’s also the Baillie Gifford Investment Trust Share Plan, in which £30 a month or lump sums from £250 can be paid into one or more of the trusts. SAINTS is also available on a range of fund platforms, including Alliance Trust Savings, Charles Stanley Direct, Hargreaves Lansdown and Interactive Investor.
SAINTS has a current ongoing annual charge of 0.93% as at 31 December 2015, other charges apply*.
Professional advice is highly recommended, particularly for those with limited experience of investing. If you want to find an independent financial adviser in your area, you can search for one on www.unbiased.co.uk
Where can I find out more?
Visit the SAINTS pages on www.saints-it.com for more information on the Scottish American Investment Company.
Baillie Gifford can also be contacted by telephone on 0800 917 2112, by fax on 0131 275 3955 or at Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.
Your calls may be recorded for training or monitoring purposes.
*Other charges include the dealing price spread.
The Scottish American Investment Company P.L.C. was created in March 1873 following a visit to the United States by Edinburgh lawyer William Menzies, who was convinced that the investment opportunities thrown up by the country’s rapid development were not to be missed.
SAINTS started by investing in bonds issued by the railroad companies of North America, as would many of the investment companies that followed in its wake. The shape of the Trust changed with World War 1, when (like many investment companies) SAINTS had to dispose of large chunks of its non-UK holdings and invest the proceeds in UK government debt.
That shift in emphasis continued after the war ended, when restrictions on new overseas investments saw the Trust invest in UK companies. The subsequent blend of UK and international investments continues to be a feature of the Trust today, surviving several changes over the years.
They include the management of the Trust, which was the responsibility of the company itself until 1970. That was when Stewart Fund Managers became the first of a series of entities to manage SAINTS before it was taken under the wing of Edinburgh-based Baillie Gifford on 1 January 2004 and since then has become increasingly global in its outlook.
Baillie Gifford was founded in Edinburgh in 1908 as a partnership between Colonel Augustus Baillie and Carlyle Gifford.
Today, Baillie Gifford is wholly owned by 40 partners who work full-time for the firm in its headquarters in the Scottish capital. It’s here in Edinburgh where all the money is managed for SAINTS.
Known for a philosophy based on long-term, global, bottom-up investing, as epitomised by SAINTS, Baillie Gifford has some £122 billion* of funds under management and advice in equity, fixed income and multi-asset portfolios run for institutional and private investors in several locations across the world. The firm manages £6.5 billion* on behalf of investment trusts which makes it one of the UK’s largest investment trust managers.
The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. As a result, the value of their shares, and any income from them, is not guaranteed and could go down as well as up. You may not get back the amount you invested.
*As at 31 March 2016.