SAINTS spotlight: the role of resilience

As with any investment, your or your clients’ capital is at risk. Any income is not guaranteed and can fall as well as rise.

In the first quarter of 2025, the quality and resilience of SAINTS' portfolio have been crucial in navigating a period marked by significant global political and economic shifts. The diversified portfolio of resilient businesses has provided some protection to the net asset value (NAV) amid the turbulence.

President Trump triggers momentous changes in the world order

The first few weeks of President Trump's new term have been characterised by a whirlwind of executive orders that have unsettled financial markets. A major change is occurring amid the chaos: the realignment of US foreign and economic policy, accompanied by a tariff war.

This abrupt pivot in US policy on Ukraine has sent shockwaves through Europe, forcing the European Union to reconsider its defence strategy. Most notably, Germany has suspended its self-imposed ‘debt brake,’ a hallmark of fiscal conservatism, and introduced a €1tn stimulus package split between infrastructure and defence spending.

Trump's tariff policies have introduced further complexity and uncertainty on the trade front. Initially perceived as a negotiating tactic, it has become clear that these tariffs represent a genuine effort to address perceived imbalances in global trade.

The short-term effects have been disruptive. US importers accelerated purchases in anticipation of higher tariffs, creating an inventory buildup expected to unwind in subsequent quarters. As companies respond, investors are left wondering whether this will further erode US consumer and corporate sentiment or is merely a temporary distortion.

China's response has been notably cautious. While Beijing has taken steps to reconcile with tech entrepreneurs and support private-sector growth, widely anticipated measures to further stimulate domestic consumption remain on hold.

Despite these challenges, the real economy has shown resilience thus far, with negative sentiment reflected more prominently in surveys than hard data.

Equity portfolio positioning and performance

The post-election surge in US equities has deflated, with the first quarter marking a sharp reversal of a trend that has dominated the past decade. US equities declined approximately 7 per cent, while non-US equities delivered positive returns of plus 2 per cent (both in GBP).

This divergence was driven by profit-taking in US equities and renewed investor interest in European and Chinese equities, buoyed by improving growth prospects and more attractive valuations. The weakening dollar accentuated the divergence.

Against the volatile backdrop, SAINTS' global equity portfolio performed as we might have expected. Returns were marginally negative, but they outperformed global equity markets, which were down approximately 4 per cent.

This reflects the approach of prioritising resilience and quality, which dampens sensitivity to market swings. This quarter, our overweight position in European equities and underweight exposure to US equities boosted relative performance.

The heightened market volatility benefited several of SAINTS' equity holdings. Deutsche Börse saw a significant boost following Germany's suspension of its debt brake and strong 2024 results, making it the top contributor. 

B3 and CME Group also thrived due to increased market volatility. Partners Group performed well, benefiting from renewed enthusiasm for non-US equities and reporting strong 2024 results.

On the downside, Novo Nordisk faced headwinds from profit-taking and disappointing trial results, but it remains a strong long-term performer. And TSMC shares fell as investors took profits despite strong 2024 profit growth.

While short-term fluctuations are inevitable, they should not overshadow these companies’ long-term contributions. Novo Nordisk and TSMC remain top contributors over the past five years, a testament to their enduring value creation.

Key transactions

This quarter's most significant transaction was the decision to sell UPS, the US-listed delivery company.

Recent developments have shifted our perspective on UPS, with structural competition in the logistics sector intensifying. This has diminished our confidence in the management team's ability to navigate these challenges effectively over the long term, leading us to exit the holding.

There were no new purchases this quarter. However, we took advantage of market movements to trim positions in stocks where valuations had risen meaningfully, including SAP, TSMC and AJ Gallagher. We reallocated proceeds to holdings with compelling long-term opportunities despite near-term weakness.

For example, extensive research has given us confidence that the market’s concerns about regulatory risks for Edenred are overstated, creating an attractive entry point for us to add to our holdings.

Bond portfolio adjustments

We also made changes to the bond portfolio this quarter. Rising bond yields in the UK have created opportunities to invest in Sterling-denominated corporate bonds.

These bonds have a very low risk of default and pay yields of nearly 6 per cent, making them more attractive than some of SAINTS' existing holdings in foreign bonds.

We therefore swapped USD-denominated bonds from Mexico (maturity 2110) and the Dominican Republic (2060) for Nestle and Tesco bonds maturing in 2038 and 2035, respectively.

New classification framework

This quarter, the team introduced a new way of categorising the companies in the portfolio: transitioning from types of 'growth' to types of 'compounders.'

Since introducing the ‘portfolio pyramid’ nearly a decade ago, the category ‘compounding machines’ has grown from approximately 65 per cent of the portfolio to more than 80 per cent.

Compounding machines have provided SAINTS with crucial resilience through a global pandemic, a war in Europe and rising inflation. This dovetails with our aim of delivering resilient total returns while paying a dividend premium on the index and supporting SAINTS’ dividend growth ahead of inflation.

With the compounding machines and ‘exceptional revenue opportunities’ categories making up the vast majority of the portfolio, the new classification provides greater granularity on the different types of compounders.

It divides the portfolio's holdings into everyday royalties, share gainers, market expanders and adjacency builders.

• Everyday royalties: Companies with well-established positions in markets are growing at gross domestic product (GDP) rates, selling everyday items with a very low risk of disruption. Procter & Gamble exemplifies this category.
• Share gainers: Companies compound earnings and dividends by capturing market share through superior products, services or cost efficiency. Fastenal is a prime example.
• Market expanders: Businesses benefit from more rapid compounding rates in their end markets, typically well above GDP. Novo Nordisk illustrates this category.
• Adjacency builders: Companies leveraging their competitive advantages in core markets to expand into adjacent industries. Atlas Copco is a standout example.

This internal framework is designed to help clients visualise the portfolio and understand how our holdings might contribute to long-term growth in portfolio earnings and dividends. They do not directly influence portfolio construction.

Where companies span multiple categories, they are classified according to which aspect is at the heart of our investment case.

In summary

The global economic and political landscape is undergoing profound shifts. The US is adopting a more inward-focused approach, compelling the rest of the world to adapt.

In Europe, Germany's historic decision to remove its debt brake signals a bold response, with potential stimulus effects rippling across the region.

Meanwhile, China is intensifying its focus on the industries of the future while considering measures to stimulate domestic consumption.

This quarter's rotation out of US equities marks a notable departure from the dominant trend of the past decade.

While it is premature to declare an end to American leadership, the once-unquestionable appeal of US technology companies may give way to a more balanced outlook.

This rebalancing has been helpful for the SAINTS' portfolio, and the resilience demonstrated during a period of rising uncertainty is commendable.

Despite short-term turbulence, clients' capital remains well-protected. While it would be optimistic to assume that Trump's presidency will become more predictable any time soon, we are confident that the portfolio positioning will continue to provide valuable stability and reassurance to SAINTS' shareholders.

Past performance is not a guide to future returns.

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The value of the trust's shares and any income from them can fall as well as rise. Past performance is not a guide to future returns.

This communication was produced and approved in May 2025 and has not been updated subsequently. It represents views held at the time of recording and may not reflect current thinking.

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• SAINTS invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.
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