SAINTS: fallen to earth?

As with any investment, your capital is at risk.

Amy Maxwell (AM): Hello and welcome to this webinar from Baillie Gifford hosted by Citywire. My name is Amy Maxwell and today, I’ll be speaking to James Dow, manager of Baillie Gifford’s Scottish American Investment Trust or SAINTS. SAINTS has delivered income above inflation for generations. Through war, crisis, and market mania.  In recent years performance has been tougher. We’ll be discussing the current market environment, one that seems to reward speculation over substance and ways in which that has impacted the trust. We’ll explore whether compounding has been merely interrupted, not disrupted and how the trust continues to pursue resilient inflation beating income.  Welcome, James, thank you very much for joining me today.

James Dow (JD): Thank you very much for having me.

AM: As I alluded to in the introduction, it’s been quite a challenging period for the trust. Shall we start by addressing the underperformance and how you frame it in the context of SAINTS’ long-term mission to deliver real inflation beating income?

JD: Happy to. Let’s start with that core objective. The core purpose of SAINTS, the core objective is that one that you just talked about, of growing the dividend ahead of inflation. If we can do that over long periods, that’s very, very valuable to shareholders and SAINTS has a great history of doing that. Now, the portfolio is and continues to deliver on that core objective. The earnings of the holdings are growing very solidly and shareholders will have seen that the most recent dividend announcement, the board was able-, because of that growth was able to increase the dividend once again. It was just under 7% year-on-year increase.  I think UK inflation’s running around 3.6%. Something like that.

On the income front, on that core objective, SAINTS continues to deliver exactly what is required and the portfolio’s in good shape. What’s frustrating with the performance is that if you compare the NAV growth or the capital growth of the trust against a global equity benchmark, then it’s been lagging behind. This year, in 2025 as an example, the NAV or the capital growth of the trust is pretty much flat. It’s gone sideways.  Whereas the global equity markets have gone up very strongly, roughly about 10% this year.  In fact, that’s the second consecutive year we’ve had now, where the capital growth of SAINTS has not kept up with the global equity benchmark. If we drill into that, why is that? How can it be that the income is growing well, but the capital doesn’t seem to be keeping up?

It's really to do with what’s working in the stock market at the moment and what is being rewarded and where share prices are rising?  What we see is that a reasonably narrow portion of the market, some familiar stuff like AI is a very strong theme and certain stocks there are doing very well.  Also, some areas like banks have done well. Utilities and telcos. Some narrow parts of the market have been rewarded by shareholders and the rest of the market has gone nowhere.  The trouble for SAINTS is that the bits of the market doing well are not typically very good sources of resilient income growth over long periods.  Banks are a classic example with your banking shares. You only have to go back a few years and there’s been a big cut.

SAINTS has to have selective investments in these areas, but it’s not participated to the same extent as the stock market, where those parts of the market have done really well and SAINTS has gone sideways.  To come back to your question of how do I frame this? I just come back to the core objective of the income growth over time. My view would very much be over the long-term, share prices and capital growth will follow fundamentals. As long as SAINTS continues to invest in those good earnings and dividend growth companies, eventually that catch up will happen and we’ll get the NAV growth as well. I do understand why shareholders will feel frustrated. I’m frustrated as a shareholder myself, that in the past couple of years that just hasn’t been rewarded in the stock market and it’s just the income growth that’s the bit that’s been delivering.

AM: Let’s pick into that a little bit more.  At Baillie Gifford you cover the entire growth spectrum and in that growth S-curve, SAINTS sits much more at the mature end.  The type of companies that you’re looking for are more in their golden years than say, their teenage, growth stage.  Do you want to explain a little bit more about that profile and whereabouts you’re searching and how it may be slightly different to other parts of the market?

JD: That’s a good analogy. That classic S-curve. Here are some companies that that are in that really rapid acceleration phase, like Nvidia or something like that, going up rapidly. For SAINTS, we’re more focused on the more mature phase. Not ex-growth, that would be dangerous because obviously, we’re trying to deliver income growth, but businesses that have gone past that rapid formation, early growth stage and now, they’re just delivering solid growth rather than spectacular growth. That’s appropriate for the income objective.  If I take an example, a holding in the portfolio like Watsco. Watsco is a US-based aircon and HVAC distribution business. The leader in its field. Fantastic company.

It's been around since 1956 it was founded. It’s not in its teenage years. It’s in its golden years. It’s still delivering incredible growth. I think the past five years the earnings growth will have been somewhere around 13%, 14%. I know that the dividend growth has been around 11% per year over that period. Way ahead of inflation. Fantastic. Despite the fact that it’s a 70-year-old company almost. The reason they’re such a great fit for SAINTS and what we’re trying to do is because there are huge benefits from having that greater maturity. Typically, these businesses will have much more established business models, that are less prone to disruption than come very early-stage company where the business model may not even yet be figured out.

They tend to be much more enduring and reliable. They tend to know where the growth is because they’ve been around a while. They know how you grow the business over time. In Watsco’s case, they know that a huge part of that is just building out density in their distribution network across the United States. They can generate growth from that every year as they build out the network. They tend to be much more resilient in downcycles. Often, you see high growth that lasts for a while, but then you have a tricky phase in the economy and it really can come off the rails. These are businesses that typically have been through multiple cycles. They know the right playbook. They’re self-funding business models.  

For a whole variety of reasons that less rapid growth, but much more resilient and enduring growth, in our view, is a much better fit for SAINTS’ objectives. For delivering that very long record of inflation beating dividend growth, that type of company is a fantastic fit. That’s why we focus on it.

AM: Another headwind has been that quality companies have also been out of favour. That type of company that you spoke about, which it would fall into this category that quietly compounds year after year. Why has the market turned its back on these types of companies? What do you think might trigger the next rotation back to them?

JD: At the moment, there’s definitely things that are seen as more exciting in the market. Anything with an AI label. Destined for 50% growth forever or so the market hopes. I’ve seen these periods before with quality compounders. They do have periods where they’re out of favour and they’re incredibly boring. Everyone’s like, why am I only bothering with 10% growth, look at what I can get over her? People waltz off towards that. I think that’s one thing. They’re just seen as boring. I do think there are some other things going on though. One thing that I see quite a bit is that in my view, there’s quite a big divergence between what I would call the real economy and the future economy or the ‘being built’ economy or the regulated economy.  Let me explain that.  

These more established business models, they tend to be more rooted in the real world of those air conditioning distributors or a cosmetics company like L’Oreal or an insurance business. Those kinds of things. I think something that’s maybe not talked about a lot at the moment, but is true and I see this out visiting companies. I’ve been in the States in the past month or so, you really see this. In the real economy, for those types of businesses, times are pretty tough going. There is not really much growth there going on.  A lot of businesses are struggling.  We try to focus on the businesses for whom that’s an advantage, but the truth is that the real economy is having some tough times.

Whereas, there’s other parts of the economy, whether it’s defence, AI, utilities, whatever it might be, where investors are still quite positive and optimistic. I think another reason that quality compounders have been left behind is because it is true that in the real economy, things are a bit tougher at the moment.  There’s a bit of a downcycle going on. That, I think, is also playing into where share prices are rising and falling. I don’t think that that will last forever. In fact, I’m sure it won’t last forever. It will come and go, but I think that’s probably another factor that is playing into why quality compounders have been seen as a bit boring or not the right place to be.

AM: Let’s get into this story of the AI arms race, how it plays into defence as you alluded to. Energy as well via utilities. These are all areas with strong narratives. There’s a lot of cash being thrown at all of these areas.  In the AI infrastructure buildout. The energy transition buildout. You mentioned the ‘being built’ economy.  These are areas which fit into that profile.  It would be really great to hear how you view that as an income investor and why that capital intensity is so incompatible with what you do?

JD: One thing I would say right from the start, is that no one should be in any doubt that AI and all the money that’s being spent on it, it is a big thing and it is going to be a really important part of businesses in the long-term. I don’t think at this stage there’s any doubt about that. I think as an investor and particularly, as an income investor, what you have to-, an important question to ask yourself is, where is that value actually going to accrue over the long-term? An analogy I like to use here, when we talk about this internally, and it comes right back to SAINTS’ history, is the US railroads. When the US railroads were built and SAINTS was partly setup to try and exploit this. A lot of people thought that all the value would accrue to the US railroads.

In fact, a lot of them went bankrupt. They built out and overbuilt and so forth. Actually, a lot of the value went completely different places. If you were a Californian farmer and you could suddenly ship your product with the east coast in three days instead of six months, that made fortunes. As an investor, you’ve got to ask yourself where exactly is the value from AI going to accrue. A lot of the bets that are being placed today won’t work out. Particularly for SAINTS, which is trying to deliver a long running durable income stream, we want to be quite selective about where we place those bets. Whether that be TSMC is a big holding because of the incredible barriers to entry there and very strong position. Microsoft, Apple, Schneider Electric.

One just has to be careful that you’re not following speculation and hope and you are investing in truly enduring income streams. That’s part one. I think the other part of it for an income investor that you have to think about is, which of these businesses are able to generate income as they make these investments and grow? The portfolio doesn’t own, for example, Meta, the Facebook owner. At the moment, Meta is in a phase of its like where it is investing incredible amounts of money to make sure that it stays relevant in an AI age and hopefully, can take advantage of that. The result of that is the dividend payout ratio is low and the yield is very low. As an investor, for me running SAINTS, I’m thinking there are other businesses.

I mentioned Schneider Electric as a good example.  They are a key supplier of kit into datacentres and that’s generating a lot of growth.  That’s not so capital intensive, that growth.  Not only can they deliver that growth and we can have conviction in that growth, but they also pay out a good dividend along the way, which we can then pay out to SAINTS shareholders.  I wouldn’t say it’s completely incompatible and our estimate is that we’ve got about 15% of SAINTS equity portfolio in direct beneficiaries of AI.  It’s just being careful about where are the truly long-term profits going to be?  You don’t want to accidently invest in the US railroads and can they payout the income along the way?  Those are the names that we have in the portfolio.

AM: Let’s also talk about defence. Defence has rallied. People will be looking. This is structural story with legs because we’re in a conflict-ridden world now. Defence is a long-term structural story. What is it about defence that makes you not own it and not participate in that upside?

JD: There’re other ways you can get it. We have investments in Analogue Devices, for example, the chip maker. Where there’s a meaningful part of their business that will go into defence applications. It’s in bits of the holdings is where the exposure is. I’d say the challenge with defence stocks, particularly coming back to resilient income growth over the long-term, does the structural growth in defence spending translate through into profit and dividend growth of the defence companies? That’s another big step that one has to make.  Historically at least, that has very often not been the case. There's a variety of reasons to do with, as a defence company, you’re typically dealing with one very large customer who wants to pay you the absolute minimum and wants all of the risk that we passed on to you.

If the contract overruns or if the goal of the contract gets changed for political reasons, then you as the defence company, are left to carry the can. There’s a reason why defence companies, historically, have really struggled a lot to generate consistent earnings growth and dividends and indeed, many times have ha serious financial difficulties.  Have even gone bankrupt.  Again, it’s not doubting the importance of the structural story of increased defence spending, but it’s will that translate through or how likely is that to translate through into good earnings and dividend growth of defence companies?  It’s an interesting area.  Not saying we would never invest in that area, but we want to make sure that we find good names that match SAINTS’ objectives and not just investing in the thematic if you like.

AM: We’re talking there about cyclical versus structural growth. Let’s delve deeper into some more of the portfolio positioning. You mentioned owning names like Nvidia and Alphabet and more European quality growth like Schneider Electric. Can you talk more about some of the European quality growth names that you are really seeing deliver on that resilient income front?

JD: You were asking about European companies that are delivering and I was referencing Deutsche Börse, which is a fantastic business. Very strong position in its market and it’s seeing good structural growth where it’s basically the only company ion many of its products, where it can provide the hedging of financial instruments to different market participants. There’re multiple growth drivers going on there. Whether it’s regulators want to move more business onto exchanges so that it’s visible and transparent. Whether it’s just the increased desire for hedging or new types of risk instruments. Their own innovation within their business of things that people can use those derivatives for.

A very strong business. Very cash generative. Delivering really good growth as an example of a European holding that’s been doing that. This is an eclectic bunch of different names. Amadeus is another one that I like to point out. It’s not one that people are hugely keen on at the moment. If you look at what’s going on there in terms of their airline software IT business and the hotel software business that they’re building, again it’s a European company which is fantastic and very strong market position. Great growth runway ahead of it. Very sensible management team and they’re delivering on that growth. Lots of different interesting names that you can find as an investor around Europe, that are delivering on growth. Even if they’re not as exciting as some of the other names people are chasing at the moment.

AM: To your point about the railroads, this Amadeus. You’ve got software that’s backing up hotels, property management. Airline software. It is the AI theme, but through a different lens. 

JD: A big thing for us is, when you own the company, you want to feel that it’s in the right place that it can grow its business, but also, it’s got really good people who are seizing that opportunity. 

I’d say where AI plays into that is just the management teams, we have confidence that they are all taking advantage of that opportunity and saying here’s where we can apply it to reduce our own costs or to provide a better service or to find new data applications. I guess, most companies are in some way, AI exposed or they’re using it in some way. Revenue or cost-wise. Definitely, we make sure that we’re backing management teams who are living in the future and not living in the past. Saying how can we use this?  How can it make our business better?

AM: To close this interview before we move to the audience Q&A, let’s talk about some of the other holdings that are non-equity.  You do hold a little bit of property and infrastructure and a smaller exposure to bonds. Can you talk us through what role those areas play within the portfolio?  

JD: The investment trust structure has this fantastic benefit which the board and we are really keen to make use of.  The ability to borrow at fixed rates very long-term. SAINTS takes advantage of that. Not excessively, but as prudent borrowing.  About 10% gearing. We’ve got debt locked in at about 3% average cost all the way out into the late 2040s. For many years to come. Fantastic advantage of investment trusts. Then what we do on the opposite side of that, what is effectively a nominal liability, is we invest it in mainly real assets.  There’s a little bit of bonds in there, but mostly property and infrastructure related names. Again, 10% of the portfolio, keep it in context, the equity portfolio delivers most of the real growth.

There is a great advantage there, of borrowing at 3% and then investing in real assets, which generate more income, which we can pay out to shareholders and deliver some growth over time. 

That’s the principal use of it and it’s been a successful strategy for the trust over many years.

AM: I’m going to go over to our audience questions and we do have a few that have come in whilst we’ve been chatting. The first one, keep it on theme with AI, “How well is SAINTS positioned to cope with an overvalued market crash? Can the tech giants continue to grow as fast?”

JD: It should be very well positioned. Just as we felt the pain of not having a big exposure in all the more speculative parts of the market and riding the upcycle, SAINTS should very much be protected if that cycle turns. If Meta comes out in the next six months and says going to take a pause on chips. Got enough chips for now, we’re just going to run the datacentres. If that transpires or however it plays out, then the holdings that are within SAINTS that are related to that should still be very secure.  We’ve kept those in balance in the portfolio.  They’re not too big and the names that we own are unusually resilient and robust. They have other sources of income and they’re committed to progressive dividends.

I think probably what you would see then is that the NAV performance of SAINTS relative to the index, which has lagged in the past couple of years, I suspect will do a lot better than the index in that scenario.  Certainly, we would hope that the income remains very robust during that period, despite that rollover. Anyone sceptical, they’re in the right position here. 

AM: Second question. “Are golden year companies preferred by SAINTS more prone to disruption as they can be seen as more set in their ways and therefore, unable/unwilling to change?”

JD: It’s definitely a risk that you do see from time-to-time. I would say it’s probably lower risk than some of the faster growth areas because often those are new industries that are being formed where profit pools are not clear. When everybody’s chasing after and investing capital. They’re probably less risky than those areas, but I think the question is absolutely right, there is still risk and they can be prone to those. An example I like to use is Kraft Heinz, which has had a pretty terrible time over the past ten years. Variety of reasons. You could argue it had become a bit set in its ways. Thought everybody would always eat baked beans and didn’t do enough on the innovation front.  Was more about cost cutting and they’ve paid the price for that.

Definitely as managers of SAINTS, one of our core jobs is make absolutely sure that we’re investing in the really great growth companies you can find in their golden years. Whether that’s Watsco, Amadeus Deutsche Börse, you name it. These businesses have all been around a while. Make sure we’ve got those ones that the management teams are fully alert and are investing for the future and stay away from the ex-growth high yield disruption prone names that are also older companies. If we do that, then we can have the best of both worlds.

AM: You want the wisdom, you want the experience, but you also need to ensure that they’re still relevant.

JD: Absolutely and the growth. Ultimately, SAINTS comes back to trying to grow shareholder’s dividends and income ahead of inflation and over time, that capital should follow along with that. It’s one of the reasons why SAINTS’ yield is a bit lower than the average income fund. It’s because there’s a real trade off there between today’s income and that growth. In the long-term, you’re going to be much better off as a shareholder with the growth coming through and the compounding benefits of that, we do everything we can with SAINTS, to make sure we’ve got that growth coming through over the long-term.  

AM: “Can you provide us with valuation metrics signifying where SAINTS’ companies presently stand within the market against their longer-term range?  For example, in terms of PE.”   

JD: It’s actually a very interesting question because something unusual has happened in the past few years, which is that historically the multiples, the valuations of these high-quality long-duration compounders typically were a few points higher than the market. Not a lot, but a few points higher than the rest of the market. What’s happened in the past couple of years is that those PEs have trickled down and the market has gone up. To the point that now, I think this is quite exciting, you’re paying zero valuation premium for much better-quality companies. Much more resilient and should have much greater longevity to them.  A very astute question.  It’s absolutely true the PE multiple has compressed.

Now there’s no difference between a three-year-old company with very little revenue making losses and a very established company with good growth runway ahead of it, which should survive through thick and thin.  Which I think is crazy, but also, a great opportunity.

AM: Feeding into that, “The word ‘quality’ is being used by many managers who’s funds have missed out on 2025’s market rise. What are the characteristics which distinguish quality from value and growth?”

JD: I think some of the defining characteristics and you ask different people, you’ll get different definitions, but one of the key ones is, what kind of return is the company earning on the capital that shareholders have invested? There are some companies, they make a lot of earnings, but if you think about them, they invest a billion dollars of capital to make one dollar of profit. The return on that capital is awful. You might as well just stick it in the bank. Whereas, there are other companies that earn really incredible returns, 30%, 40% a year on shareholder’s capital. Those are regarded as higher quality because what it signifies is that they’re doing something in their business with their products and services that’s really valued by their customers.

They’re prepared to pay up to the extent that they’re earning those returns. It’s often seen also, as a signal that because they are doing that, they’ve probably got more longevity to them because they’re doing something really right and customers will probably stick with them. They’re probably going to be able to absorb shocks in the market a bit better in the economy. For a variety of reasons, that’s a key metric that people look at to determine quality. I’d say it’s not only that because the trouble with quality is it can lead to a very backwards looking assessment. That Kraft Heinz example I gave, there was a point in time where you’d say Kraft Heinz is a very high-quality company. What it doesn’t really tell you about is the future.  

It could be that a business has been strong, but it’s going to get weaker in the future and earnings growth is going to be challenged.  People use it as a proxy and they think it’s a good thing. For us in SAINTS, the critical thing is, yes, we want to own high-quality companies.  We don’t have to own really [marker 30:00] businesses, they tend to be unsustainable. We also want to be sure that that quality is very likely to endure long into the future and keep generating all those profits and dividends. That’s the real trick that you have to pull off.  Too often, quality can be backwards looking and not forward enough looking. As you can imagine, that’s a huge focus for us, is that forward looking piece of quality.

AM: Often the word ‘moat’ is used for quality growth and big barrier to entry. This defensive moat around what it is that you produce. Are there examples that you could provide to the audience, of companies that really have that moat? That really define that quality, that deserve that quality label?

JD: I mentioned Deutsche Börse and in fact, we have a few in SAINTS portfolio. Also, CME Group, the equivalent in the States, is another example.  A couple of others. These exchange businesses have a phenomenal moat. The reason for that is that because of the way the business works, when everybody goes to trade in a certain area, it reduces the costs massively for everybody who’s trading in that area. It’s a bit different from equity exchanges. I won’t get into the nuances of it, but basically, it reduces the cost dramatically. If you’re a new entrant trying to compete and offer a similar service, almost by definition, your costs to that customer are going to be way higher than the incumbents.  

Then you put on top of that that regulators typically don’t want multiple different exchanges because they like more control and visibility and you end up with these businesses where it’s very, very difficult to compete against them or to be disrupted because you just can’t offer the same cost.  The pricing has to be way higher.  That’s an example of the sorts of moats.  There are multiple different types of moats that you can have, but it’s some kind of an advantage which is just very, very difficult for any new entrant to replicate.

AM: We’ve got another question here. We’ve talked about the risk of an AI bubble bursting, this is talking about impending liquidity crisis, especially the interbank lending in the USA. “Are you seeing this and how could it affect the portfolio?”

JD: The thing that there has been a bit of a sign of is private credit, there’s been a huge amount of growth of private credit in the past several years and everybody’s been jumping onto that train and trying to lend to lend to each other in the private credit market. There are some signs of strains there. That maybe loan standards have not perhaps been as high as they could have been as everyone’s been chasing loans.  Less so with interbank lending, but generally, I think the question is a really good one because when you have periods of market stress and financial system stress, that is often a key contagion risk that goes around.   One of the reasons that SAINTS has very little exposure to banks is because of that risk to earnings and dividends.

That’s often one of the reasons why dividends end up getting cut in stress times.  Not seeing huge signs of it now.  There’s a bit of concern about private credit.  Structurally, it’s a reason why SAINTS tends to be really quite careful about getting involved in any of those areas because of that risk.

AM: We’ve got another question here, “If we’re in a new phase of shorter, hotter cycles, what’s the ideal environment for SAINTS to shine again?”  Firstly, do you believe we’re in an environment of shorter hotter cycles?

JD: I think that’s true, actually, yes. It’s just compared with what I’ve seen over a couple of decades of different market environments. I think the structure of markets has changed as well. Who is driving markets? Whether it’s ETF flows or different types of buyers. You see huge overreactions and underreactions to things, where businesses are not really changing profoundly, but their share prices can be up or down by huge amounts in a day. Things are very hot for a period of time and they’re really out of favour for a period of time. I guess the way I see it is that it should really be a benefit to active stock pickers and for SAINTS because it throws up more opportunities. I’ll give you an example.

A business that we’ve admired for a long time, tremendously high quality, really great people and really good structural growth over the years is Accenture, the technology consulting company. The stock market has absolutely taken a downer to that and it’s been really heavily derated in the past couple of years.  To the point that we’ve done our research and due diligence and gone and met them and a variety of things.  We’ve taken a holding for SAINTS because we’re saying at this point, the share price is assuming this is almost a broken business, but it seems to us, it’s actually most likely still a very strong business and good growth and resilient dividends in the years ahead.  

My point is that with these shorter hotter cycles, the interesting thing is it should throw up opportunities for active stock pickers, as long as we ask for some patience from shareholders because those won’t turn within five minutes, but it gives you opportunities to invest in really good businesses for the long-term, that people have for whatever reason, thrown out of bed or decided it’s not flavour of the month. I find that quite exciting as a stock picker.

AM: Accenture is the consulting firm, does AI again bring the end of consulting?  AI can do it, these companies aren’t going to exist? Or is it a human thing? Somebody’s going to need to hold your hand through transition.  You’re always going to need experts. The machine can’t do it all.  Do you think we’ve gone too far down that line where the baby’s been thrown out with the bathwater?

JD: I believe so. AI is certainly part of that concern around Accenture. I think it’s probably a little bit of a disservice to consultants, to think that all they do is come up with a zippy strapline of you can do this. 

There’s a lot more to their business and what they do. The playbook specific to industries. The human element of it.  Some parts of it, I’m sure, can be augmented with AI, but I don’t think it replaces the core function at all.  In fact, in some ways might make it more valuable and quicker answers and so forth. That’s exactly the kind of thing where to me, it’s a bit reminiscent of going back six or seven years, there was a thing with Amazon.

There was a rumour that Amazon was going to get into healthcare. Amazon was going to get into this, that or the other.  DIY. Grocery, etc. Anything in that sector, terrible six months, or a year. The shares would sell off.  Amazon’s coming. In a couple of select industries, Amazon did come. That was really painful for those incumbents where they built businesses, but in the vast majority of cases it didn’t work out and it wasn’t true and Amazon itself found that it was too hard and it pulled back. In some ways, this feels a little bit like that to me. AI comes and everyone says that’s disrupted and that’s the end of it. Typically, what it’s doing is, new technologies tend to bring new use cases and augmentations.

I think people often worry a bit too much about the disruptions and the replacements. That’s not typically how it works. Again, as a stock picker, you’ve got to do your analysis, but if you look through it and say, on balance I think it’s much more likely that this is an opportunity to invest at a lower share price and AI is an augmentation rather than a replacement. That can throw up some really good investment opportunities.

AM: We’ve got another question here, which we haven’t really touched upon throughout the session so far.  “Inflation, if it stays sticky which parts of the portfolio are best placed to keep real income growing?”

JD: Well, the objective is the whole portfolio should do that basically. We don’t really rely on a part of the portfolio to do that. It’s a little bit tricky to say which is-, it’s true that some will turn out to be best placed, but before the fact, it’s often a little bit tricky to work out where that’s going to be. You can’t be sure because each industry will have different dynamics. Overall, at the portfolio level, we have confidence that just as-, I think we saw that in the high inflation period when inflation peaked around 9% or 10% in the UK and SAINTS dividend managed to match or slightly beat that.  We saw really good dividend growth coming through the portfolio, despite that. It's generally, I think, about being in these golden years’ businesses, which are very highly valued.  

Have high returns. They have some pricing power. They know the playbooks. They can flex their costs over their suppliers if need be. We aim for that across the SAINTS portfolio.  In a period of sticky inflation, I guess a good point in case is most economists thought that this year, by now, we’d be back to 2% inflation. Now, that’s not proved to be the case and we’re still sitting around 3.5%. In that environment, SAINTS just put up its latest quarterly dividend by just under 7% and that’s supported by the dividend growth from the portfolio.  I might say despite a currency headwind that we’ve had as well. I think that’s another proof point that across the portfolio we expect that good inflation beating ability and we’d really expect that across all of our names.

AM: We’ve got a question here about the technicalities of the investment trust. “Why is the discount to NAV widening?”

JD: It’s one of those slight unanswerables because you’re never quite sure why. You can’t really interview the people who are selling at the discount and buying. My view as a general view, I think it’s to do with the relative performance of the fund. I think that because the NAV growth has been flat to up a bit and the market has done much better, I think probably, money has flowed to those areas and that has kept the discount around the 10% mark. Now, again the good thing about investment trusts and a proactive board, is that with buybacks, you can actually create value for remaining shareholders by buying in at that discount.  Of course, it’s an opportunity for people to buy more at a discount to NAV.  

I would say fundamentally, I think it’s probably because the NAV growth of the trust has, the income growth has been good, but the NAV growth has lagged. I think that’s probably what it comes down to.

AM: We’re in the closing moments now. The last question here, “What do you think is the biggest misconception about SAINTS that you would like to correct?”

JD: The biggest misconception about SAINTS, I think the one that I understand, but it’s important to be clear about, is probably about the yield. The thing that a lot of people say is a lot of income trusts have a 4% yield and this is only 3%, so why would I bother? It’s actually true and the answer to that is over the long-term, you’ve got really quite a big trade-off, in our view, between yield and long-term growth.  If you’re prepared to have a slightly lower starting yield, you should get, and SAINTS has history of delivery this, much stronger and more resilient growth in income capital, that will leave you much better off over the long-run.  As a shareholder, you could of course, come out of a trust altogether and buy a bond or a gilt on a 5% yield.

That will give you more income next year. The problem is, is that over a long period of time with inflation eating that away, you’re going down.  It’s a wasting asset and your income’s going down in real terms.  Maybe it’s unfair to call it a misconception, but I know that that is the one where it’s important to be clear about what SAINTS is and why it’s attractive. Is with that lower starting yield, it should be much better placed to deliver long-term income growth and a much more resilient income stream.

AM: Especially in an era where inflation is looking to stay elevated. We’re not going back to the very post-crisis era. We’re in a structurally higher inflation era really.  To be committed and to have that experience in delivering above inflation income growth is really something to hold

JD: Yes, and as managers, we have high confidence that that should continue because of the good names in the portfolio. Baillie Gifford is growth oriented. We’re structurally about delivering that growth and about beating inflation. That’s why we have high confidence that that long record should continue for many, many years into the future.

AM: It’s steady, it’s not flashy. Thank you so much, James, for sharing all your insights with us today. Thank you to our audience for joining us. We hope you found today’s session useful and if you did, we have plenty more coming up. So do keep an eye out for those. Thank you so much.

Scottish American Investment Trust

Annual past performance to 30 September each year (net %)

Source: Morningstar, share price, total return.

Annual SAINTS dividends

Source: Baillie Gifford & Co. Total dividend per ordinary share. Pence per share. Year to December.

Past performance is not a guide to future returns.

Legal notice: The index data referenced herein is the property of one or more third party index provider(s) and is used under license. Such index providers accept no liability in connection with this document. For full details, see www.bailliegifford.com/legal 

Risk factors

This communication should not be considered as advice or a recommendation to buy, sell or hold a particular investment. This communication 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. 

The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. The value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested. The level of income is not guaranteed.

Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA).

The specific risks associated with the Trust include:

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.

The Trust can borrow money to make further investments (sometimes known as “gearing” or “leverage”). The risk is 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.

SAINTS has some direct property investments, which 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 invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.

The Trust can buy back its own shares. The risks from borrowing, referred to above, are increased when a trust buys back its own shares.

Market values for securities which have become difficult to trade may not be readily available and there can be no assurance that any value assigned to such securities will accurately reflect the price the Trust might receive upon their sale.

The Trust can make use of derivatives which may impact on its performance.

Corporate bonds are generally perceived to carry a greater possibility of capital loss than investment in, for example, higher rated UK government bonds. Bonds issued by companies and governments may be adversely affected by changes in interest rates and expectations of inflation.

Share prices may either be below (at a discount) or above (at a premium) the net asset value (NAV). The Company may issue new shares when the price is at a premium which may reduce the share price. Shares bought at a premium may have a greater risk of loss than those bought at a discount.

Further details of the risks associated with investing in the Trust, including a Key Information Document and how charges are applied, can be found in the Trust specific pages at www.bailliegifford.com, or by calling Baillie Gifford on 0800 917 2113.