Footwear maker Anta Sports is an unexpected but successful holding
"Invest for long-term income, not short-term yield," advises Toby Ross, manager of Baillie Gifford's Scottish American Investment Trust, or SAINTS (LSE: SCAM). An investment of £10,000 in a typical UK equity income fund in 2004 that yielded over 5% would have returned 53% by the end of 2016, with dividends reinvested. A fund yielding 4%-5% would have returned over 70%; one yielding under 4% over 100%.
An investment in SAINTS, however, would have produced 169% from a starting yield of just 3.8%. While there is a conflict between paying dividends now and funding capital growth in the long term, says Ross, "we seek companies that can do both".
Impressive returns
Two-thirds of the portfolio is invested in "compounding machines" firms with enduring competitive positions, strong balance sheets and proven management. Half the remainder is devoted to firms with "exceptional revenue opportunities" and the other half is divided between companies with "the potential to transform their profitability" and those with the prospect of a structural improvement in cash flow as capital spending is scaled back. The international remit means there are ten times as many firms in the investment universe than would be available just in the UK. Sixty percent of the stocks held are also in other Baillie Gifford funds, but the income bias means a much lower North American exposure than in global indices. Just 22% of the £570m portfolio is invested in the US, 36% in Europe and the UK, 17% in Asia and emerging markets and 5% in Australia.
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Meanwhile, 15% of the fund is in a portfolio of directly held high-yielding property, externally managed by investment manager OLIM, and 5% in fixed-interest investments and cash. The property and bonds finance an 8% debenture to be redeemed in 2022. Its replacement by cheaper borrowings should moderately enhance an already impressive performance: a three-year return to 30 April of 39%, and a one-year return of 10.4%. These are 8% and 2.6% respectively ahead of the FTSE All-World index and similarly ahead of the average of their investment trust competitors. Given the low exposure to US equities and to tech giants, necessitated by the search for income, this is quite something.
The bad news is that this performance means the shares now trade on a 3% premium to net asset value (NAV) and the dividend yield is only 3%. Dividends have increased by an annual 3% for the last ten years; investors could hope for more, but as Ross says, "utilities, tobacco companies and other high yielders don'treally fit into our growth model".
Instead, the list of holdings is headed by Deutsche Brse (the German stock exchange), followed by Chinese footwear business Anta Sports and Coca-Cola not names you would expect to find in an income portfolio. Anta Sports has been growing revenue, profits and dividends by 50%-60% for the last three years.
This trust is hard to beat
SAINTS shows that Baillie Gifford's skills go beyond mere growth investing. The trust's judicious blend of income and growth stocks suggests that its star is unlikely to wane for some time. In common with other Baillie Gifford funds, portfolio turnover, at 20%, is low; ongoing charges, at 0.8% of NAV, are cheap; and the overlap with benchmark index, at 10%, is also below average.
For those looking for a reasonable yield and long-term income growth from an international portfolio, Scottish American is hard to beat, even at current prices.
Short positions... City regulator to probe Mifid rules
The Financial Conduct Authority (FCA), the UK's financial regulator, plans to conduct a review into the Mifid II regulations recent EU rules that changed how asset managers pay for the research they use to make investment decisions, says Chris Flood in the Financial Times. The regulator is concerned about inconsistencies in the interpretation and application of the rules, which came into force in January. Mifid II requires asset managers to "unbundle" the cost of research from transaction charges and trading commission. This is supposed to ensure that their decisions cannot be influenced by receiving research for free. However, the costs of research packages now offered by some of the big banks are "totally out of whack" with pricing elsewhere in the market, says Joshua Maxey of investment research company Third Bridge, raising questions over whether some of the pricing packages could be viewed as an inducement to go with that particular provider, contrary to Mifid rules. The FCA plans to write to companies in the industry over the next few weeks to ask for details about research pricing models.
Invesco has launched Europe's first Saudi Arabia-focused exchange-traded fund, says Tom Eckett in Investment Week. The Invesco MSCI Saudi Arabia UCITS fund will track the MSCI Saudi Arabia 20/35 index, which is made up of 22 large and mid-cap companies. The country was upgraded to emerging market status by index provider FTSE Russell in March this year, with inclusion in the index due next year; MSCI is expected to make a similar decision this week. These reclassifications should prompt passive funds that track indices to adjust their weightings accordingly.
Activist watch
Activist investor Carl Icahn has won a majority of seats on the board of oil and gas company SandRidge Energy, says Cara Lombardo in The Wall Street Journal. Icahn, who with 13.5% of shares is the company's top shareholder, has criticised its dealmaking and executive pay. He was "vocal" in his opposition to SandRidge's (now abandoned) bid to buy Denver-based Bonanza Creek Energy last year, and its rejection of an unsolicited offer from Midstates Petroleum this year. This week's vote was closely watched not only because Icahn sought to replace an entire board, but also because it was one of the highest-profile proxy fights so far to use so-called universal ballots, which allow investors to select a mix of both management and dissident nominees.
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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