And the winner is...
Winner: Scottish American
Scottish American Investment Company (SAIN) aims to be a core holding for private investors seeking a dependable source of real income and capital growth. Invested in a diversified portfolio of global equities, the trust has achieved much the best net asset value (NAV) total return in its sector since James Dow and Toby Ross of Baillie Gifford took charge in August 2017.
They select 60 or so equity holdings from a global equity universe of companies capitalised at over £1 billion. They expect that universe to expand from 4,500 to 5,400 companies now that BG’s new research office in Shanghai is providing locally based coverage of domestic Chinese companies.
The portfolio is divided into four categories, with “compounding machines” much the largest at 72%. These are companies with enduring competitive positions, strong balance sheets and proven managements, which are expected to deliver above-average cash flow and dividend growth. They include SAIN’s top three holdings, Coca-Cola, Roche, and Proctor & Gamble, none of which exceed 3% of the overall portfolio.
Ross and Dow emphasise the need for their holdings to have “dependable” dividends, meaning they are expected to prove resilient through business and economic cycles. Investee companies are also expected to be managed in “a genuinely sustainable way,” as only then will their income streams be “truly sustainable”.
Aided by a dedicated sustainability analyst, the managers seek to engage constructively with companies on environmental, social and governance (ESG) considerations.
SAIN’s yield is the lowest in its sector, but it is generally almost or fully covered by earnings, unlike most of its peers, which fund their dividends predominantly from capital. SAIN’s dividend has been raised in each of the past 40 years, it has grown faster than CPI since 2013 and the board’s determination to maintain a smooth progression is underpinned by useful revenue reserves.
Managed by: James Dow and Toby Ross since 2017
Sector: Global equity income
3-year NAV total return: 39.5%
3-year share price total return: 46.6%
Average premium for sector: 3.4%
Ongoing charges: 0.76%
Holdings have reliable dividends
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Securities Trust of Scotland’s (STS) manager Mark Whitehead took charge in May 2016. Thanks to a strong performance in 2019, it has achieved the second-best NAV total return in its sector over the past three years. However, like Scottish American, the trust has a relatively low yield – despite funding the dividend predominantly from capital.
Like the award winner, Whitehead also focuses on companies with financially robust and sustainable business models that are expected to generate strong cash flows and support dividend growth even in a difficult environment.
ESG considerations are a key influence on Whitehead’s investment process, as they are for other portfolios managed by Martin Currie, which is highly rated in respect of its ESG credentials.
STS differs from SAIN in holding a more concentrated portfolio of around 42 companies, with its top 10 holdings accounting for nearly 40%. Investments are selected on a bottom-up basis, but diversified across 14 countries so as to limit exposure to domestic market issues. NAV volatility has been relatively low.
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