The Scottish American Investment Trust, or SAINTS as it is also known, was established in 1873 by William Menzies who thought he could help deliver an income to savers that was better than the “pitifully low” 3.5 per cent offered by the Bank of England at the time.
While SAINTS is now 144 years old, its current co-manager James Dow believes it is just as relevant to investors now as it was back then, due to the current demand for income among shareholders.
The manager noted that aside from the low yields available from cash and bonds, longer life expectancies mean anyone retiring today can expect to live for another 20 to 30 years and so any investment vehicle that can deliver a stable income over this sort of period is highly desirable.
“There’s a myth that when people retire they do all those things they always wanted to do immediately, such as go on cruises, then over time they slow down and don’t spend any money, they just sit at home all day watching UK Gold,” he explained.
“That is a bit of a myth. Because first of all most people in retirement are now a lot more active than they were a few years ago and will continue to do things. Also, as they get older they will look for income for things like healthcare expenses, so there is a need for income through that 20- or 30-year period and it’s more relevant today than it has ever been.”
SAINTS is currently yielding 3.07 per cent; data from FE Analytics shows someone who invested a lump sum of £10,000 in the trust 10 years ago would have made £4,593.32 in income alone over this time.
It doesn’t just focus on income, but growth as well, which is one of the reasons why it has been able to increase its dividend in every one of the past 38 years – only 10 trusts have beaten this record – and hasn’t cut its payout since 1938.
Dow noted that while prices have increased by 60x since 1938, SAINTS’ dividend has grown by 700x, highlighting its worth as an inflation-busting source of income.
He explained the trust has achieved this as the result of a “not very genius idea”, which is that to deliver growth and a dependable income over time, it needs to look for companies that are doing exactly the same thing.
“So we are looking for companies which in our view over a period of many years are going to pay out a dependable dividend to shareholders and are going to grow at the same time,” the manager said.
“And if we put together a diversified portfolio of those names, that will help us deliver on that ambition.”
While this is a simple philosophy, Dow said the hard work lies in actually finding these companies. To do this, he and co-manager Toby Ross use a stock selection framework to wheedle out companies with a high dividend yield but that are risky, and exciting growth companies that have no dividend and are unlikely to ever pay one.
They then focus on those companies that are left, asking nine questions including “what are the real growth expectations over the next five years?”, “are the dividends dependable?” and so on.
Dow said this process helps him to split his holdings into four different categories, the largest of which is called “compounding machines”, at 66.3 per cent of the portfolio.
“These are businesses with enduring defensive positions,” he said. “Some of them have been around for as long as the investment trust itself. They have very strong balance sheets and good management teams that will consistently deliver above-average cash-flow growth and dividend growth to shareholders.”
Next up are “exceptional revenue opportunity” companies, at 16.5 per cent of the portfolio, which are those that are witnessing an unusually rapid growth in earnings; “profitability transformation” firms at 9.7 per cent, which are turnaround stories; and “capital decisions”, at 7.6 per cent, which are companies that have shifted cash allocation priorities, leading to more money being made available for dividends.
“I would say we have a pretty low-turnover approach, so a lot of these companies have been in for years and years and will stay in for years and years, that’s the way we manage things to get that long-term benefit,” Dow continued.
“But the key point is that everything we own within SAINTS not only must pay a dependable dividend, it should also have good prospects of real growth over time to extend our record.”
Data from FE Analytics shows SAINTS has made 156.06 per cent over the past decade compared with 180.83 per cent from the FTSE All World index and 146.04 per cent from the IT Global sector.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
It is 17 per cent geared and has ongoing charges of 0.78 per cent.
The trust is on a premium of 3.07 per cent compared with 4.18 and 3.25 per cent from its one- and three-year averages.
In the first article in this series, FE Trustnet looked at the 150-year-old Foreign & Colonial Investment Trust.