Investing in the UK alone for income is like “conducting an orchestra that only has a brass section”, according to James Dow, manager of the Scottish American Investment Company (SAINTS), who adds that taking a global income approach “gives you the full band”.
SAINTS is famous for its record of income growth – it has raised its dividend for every one of the past 39 years, last cutting it before the outbreak of the second world war.
Dividend history of trust
Dow (pictured) puts this dividend-growth record – it is bettered by only 10 trusts in the AIC universe – down to three “unfair advantages” that give it the edge over its peers
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“The first of these is our growth credentials, as we like to call them,” he said. “It's no secret Baillie Gifford is an investment firm that is very focused on growing companies.
“We are surrounded by great stockpickers who look at growth companies and many of those also pay a dependable dividend.
“We have quite a high overlap in terms of ideas with our colleagues: getting on for 60 per cent of the names that are held in SAINTS are held somewhere else in Baillie Gifford. In terms of finding income growth ideas, we have an abundance of those just by the fact that we're part of Baillie Gifford and all the research that it does.”
The manager said the second unfair advantage he has is a long-term outlook, holding stocks for an average period of five to six years.
In a recent article on FE Trustnet, Baillie Gifford American’s Kirsty Gibson also attributed the outperformance of her fund to a lengthy time horizon, saying: “Our portfolio has a low turnover of 15 to 20 per cent per year, whereas the average in the US is probably at least 100 per cent per annum, if not more.
“We look to hold on to stocks for long enough so that the characteristics of their business model shine through to the share prices.”
Dow added: “The company [Baillie Gifford] has a long-term ethos in everything that it does. Being a multi-generational partnership, everyone is thinking about taking care of the firm and handing it on to the next generation.
“We're not in the kind of ‘two-year investment banking bonus’, you know, ‘what's the performance doing on a 12-month basis’ type of game, we are very much in the ‘what are the right investments for our clients on a five year-plus?’ basis.”
The manager believes this is particularly pertinent for income investors, as they are more than likely to be in it for the long term as well. For example, he pointed out someone who has just retired will be looking for a fund or trust that can deliver an attractive and growing income stream over a period of 20 or 30 years, rather than simply looking to outperform over 12 months, “which is the way, unfortunately, that a lot of the asset management industry thinks”.
The final “unfair advantage” is a global outlook, meaning SAINTS is not constrained in terms of particular regions, biases or sectors.
Dow said he is not just paying lip service to this contention, pointing out that the holdings of many trusts that claim to have a global strategy “are remarkably similar to the equity benchmark”.
“We will go anywhere globally where we see the best income growth ideas,” he added. “And wherever that might be, we keep an eye on the diversification, we don't want to end up with all of our income from one region.
“That's a big, big thing for us at a time when what's going to happen to the UK on a five-year view is something of a challenging call to make. With a lot of uncertainty around the UK, there's perhaps a stronger-than-ever case that some diversification, particularly for your income sources outside of the UK, is worth considering.”
Despite the precarious political situation, there is currently three times as much money in UK equity income trusts as their global peers. Yet Dow pointed out concern over Brexit is not the only reason why income investors need to look further afield.
While there are about 220 investable companies for income seekers in the UK – meaning those that pay a dividend – this rises to 2,500 for someone taking a global approach.
“That's a pretty profound difference in numbers, not sort of 1.5 times – 10 times is just a huge, huge increase,” Dow continued.
“The analogy that we harp on about is, it is the equivalent of if you went to conduct an orchestra and you turned up and there was only a brass section, you know, that that was all you had to work with to produce a performance.
“And when you go global, it's like you have the full orchestra there with you, you've got all the different possibilities ahead of you. It vastly increases the possibilities of what you can do at a portfolio level and the kind of companies that you can go into.”
Data from FE Analytics shows SAINTS has made 294.64 per cent over the past 10 years compared with 238.96 per cent from its FTSE All World benchmark and 226.57 per cent from its IT Global Equity Income sector.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust is trading at a premium of 3.83 per cent to net asset value (NAV), compared with 3.92 and 3.69 per cent from its one- and three-year averages, according to data from the Association of Investment Companies (AIC).
It is yielding 2.99 per cent and is 14 per cent geared. It has ongoing charges of 0.76 per cent.