SAINTS spotlight: patience bears fruit

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

It was the Enlightenment philosopher Jean-Jacques Rousseau who penned the famous maxim: “La patience est amère, mais son fruit est doux.” The English translation is not quite as lyrical, but it captures the meaning just as well: “Patience is bitter, but its fruit is sweet.”

While reviewing the portfolio’s performance over 2025, we find that it has, frankly, been a bittersweet year. The companies we own delivered good earnings growth: about 10 per cent higher than in 2024, squarely in line with our philosophical north-star. This underpinned the Board’s ability to raise the dividend to 15.92p.

But this underlying growth was simply not rewarded by share price growth of the portfolio holdings. Pulling apart the numbers, we see that while portfolio companies delivered rising earnings, their price‑to‑earnings (P/E) multiples – often a reflection of broader market sentiment – fell by a similar magnitude. The result was that, despite solid operational progress, the portfolio’s overall capital value remained essentially flat over the year.

Whilst we do not expect to keep up with the market during periods of exuberance, we would have hoped to deliver a stronger absolute return for clients.

In this letter, we reflect on why the share prices of the companies in the portfolio did not follow their earnings upwards or keep up with the wider stock market. We explain2025 delivered this combination of good earnings growth and flat share prices, how we have revisited every holding and where we made changes to keep the portfolio positioned for the years ahead. (Spoiler: largely positive, with a few cases where we found problems and divested).

Quality’s loss of momentum

One of the distinguishing features of the portfolio is its emphasis on ‘quality’. This term is sometimes bandied about with little explanation, but it denotes something important. Essentially, it refers to companies which make attractive profits as a ratio of their shareholders’ capital and sustain this over long periods. Many companies do not achieve this. For example, most carmakers and airlines earn profits equivalent to a 5 per cent annual return on the billions in capital they have invested in factories and aircraft. This little better than the near risk-free return that investors can earn by holding cash in a bank account. Not an attractive equation in terms of risk and reward.

SAINTS’ equity investments are concentrated in companies which earn persistently above-average returns, let’s say 10 or 15 per cent a year on shareholders’ funds, which are labelled ‘high quality’. Such returns indicate that these companies must be doing something their customers value deeply and their competitors struggle to replicate. If these companies can reinvest earnings at these high returns, they should grow faster than low-quality companies, delivering superior returns to shareholders over the long run.

The evidence is in favour of high-quality companies being the best investments to own in the long term. For example, over the quarter-century to 2025, the MSCI World Quality Index (an index which focuses solely on companies that fit the quality description) produced a total return of close to 3,000 per cent, compared with just over 600 per cent for the broader MSCI World Index.

The portfolio’s companies earn an average return on invested capital – a measure of how efficiently the company turns investment into profit – of about 15 per cent, almost 60 per cent higher than the stock market average. It is clearly a ’high-quality’ portfolio of holdings. But in 2025, frustratingly, these types of companies saw limited share price appreciation.

A typical example is Schneider Electric. As the world generates and consumes ever more electricity, from solar panels to datacentres, Schneider’s sales and profits are growing. In 2025, its earnings rose by 10 per cent and the dividend was raised by 10 per cent, but the share price was flat during the year.

This pattern was repeated across the portfolio: rising earnings offset by falling P/E multiples. Quality compounders typically trade at a premium to the index, given their proven ability to deliver resilient returns through the market cycle while also outperforming over the long term. But during 2025, SAINTS equity portfolio de-rated, ending at about 22x trailing, or 19x forward earnings. This is well below the portfolio’s historic premium of three to four P/E points above the index. Indeed, it has never been so ‘cheap’ relative to the broader stock market.

What drove markets in 2025

Two stories essentially drove stock market returns in 2025.

One was artificial intelligence (AI). Some investors are betting that numerous companies will see a continuing boom in profits from this terrific new technology. Many of these companies saw their P/E multiples go up last year. While the portfolio has several AI-related investments, it is not as large and concentrated as the benchmark’s exposure, which we view as rather risky. It takes time for long-term winners to show themselves, and being early to bet does not correlate with returns. We don’t intend to gamble clients’ money unless we have high conviction in long-term success.

The second big story was the interest rate cycle. Many cyclical names, whose profits tend to rise and fall with the economy, saw their valuations rise in 2025, on hopes of continued rate reductions by central banks. This benefited some of the lower-return, lower-quality businesses in the stock market. It was much less of a tailwind to the portfolio.

Momentum in these two parts of the market was very strong. Money flowed into names linked to these themes, and their valuations rose. Meanwhile, more traditional industries – consumer goods, healthcare and professional services – suffered declining valuations as investors rotated money out of them. This momentum has no doubt been reinforced by the ongoing shift to passive investment, where funds are effectively switched into the most concentrated and most expensive parts of the market, funded by the indiscriminate sale of the rest.

This is unlikely to continue in the long term. Ultimately, sustained earnings and dividend growth drive capital appreciation, even if there are periods when the two become disconnected. The continued growth in the portfolio companies’ earnings should, with patience, bear fruit in capital growth. This is even more the case now that last year’s earnings progression is, as yet, unrewarded in share price appreciation.

Finally, in reviewing performance over the year, we should acknowledge that there have also been stock-specific disappointment.

What we did in response

First, we checked every investment case to ensure holdings remain on track. Where we believe competitive advantage and long-term growth remain intact, we are swallowing the bitter taste and staying patient. This included the portfolio’s two weakest performers last year, Novo Nordisk and Edenred, which faced real, well-publicised headwinds. After in-depth review and engagement, we increased both positions because of the strength of the underlying growth opportunity, combined with even more attractive valuations.

Second, we divested where our analysis suggested the investment case had fundamentally weakened. Over the year, we divested from UPS, where new competition has raised serious challenges to future growth. We also sold TCI and Man Wah, where brutal competition in China has reduced our confidence in future growth. In the final quarter, we divested from Cognex after observing signs of market share loss in key markets and our ongoing research had raised questions about its growth strategy.

Third, we replaced these holdings with new investments we believe can deliver strong capital and income growth over the long term. Earlier in the year, we added Accenture, and Jack Henry. In the second half of the year, following the sale of Cognex, we made new investments in MSCI, Alphabet, MediaTek and Zoetis.

New investments

Alphabet was, until recently, a poor fit for SAINTS’ strategy and we judged it too risky to invest in. The company refused to pay dividends, and it faced a US Department of Justice case seeking its breakup. The company has at last initiated a dividend, and in September, the judge ruled that a breakup was unnecessary. We foresee years of strong growth ahead. AI is likely to be a significant growth driver for the company in its core search business. It is unique in owning: 

• leading AI technology developed in-house
• an advertising business that allows it to monetise AI profitably
• prodigious cash flow to invest in this area
• and numerous reinforcing advantages such as its cloud business, YouTube platform and more besides.

MediaTek is a Taiwan-based digital chip designer with excellent engineering capabilities. We are particularly excited by the potential of its ‘ASIC’ chips as AI continues to evolve. We expect AI to move from an ‘investment at all costs’ mentality to a more cost-aware approach, and we also expect dual-sourcing away from Nvidia. We believe MediaTek’s cost-efficient chips are an excellent alternative.

Zoetis is a leading innovator in pet pharmaceuticals. Following the exuberance of the Covid period, when its shares became very expensive, Zoetis has suffered a big de-rating in the past couple of years. Investors fear weakening consumer affordability will reduce spending on pets. We are looking through this short-term fear and taking it as an opportunity to invest in a good long-term compounder at a reasonable valuation.

Context

Stepping back, we see a common thread in our holdings, which is the companies’ ability to reinvest at attractive returns for a long time. That is what ultimately drives durable earnings and dividend growth.

Looking ahead, 2026 may yet prove a choppy environment for markets, which are pricing in continued good growth. Equities are priced for the good times to roll on, but geopolitics are increasingly unstable, inflation has not gone away, the jury is out on the efficacy of much AI-related capital expenditure and there is always a risk from those wildcard factors which no crystal ball can foresee.

However, whatever the world throws at investors in the coming year, we expect SAINTS to demonstrate greater resilience than the broader market, given the high quality of the businesses the Company owns. Quality compounders can lag during periods of exuberance – but they tend to prove their worth when conditions get tougher.

After the de-rating we’ve seen in the past year, valuations across the portfolio are compelling relative to history and the market. The underlying fundamentals of the holdings remain strong. Our focus remains consistent: investing in good businesses with high potential for 10 per cent compound earnings growth that should last for many years to come, while paying resilient dividends every year.

We hope you agree that’s a compelling formula for dependable long-term investment success. It’s an approach that, in 2025, continued to bear fruit for shareholders in terms of dividend progression, without taking on too much risk. We are optimistic that, with continued patience, the earnings growth being delivered by the portfolio will again be rewarded with capital appreciation, in addition to continuing to support SAINTS’ strong dividend growth over time.

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 January 2026 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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