Scottish American (SAIN ) was a beacon of hope amongst Baillie Gifford’s other investment trusts last year as the global equity income fund beat its stock market benchmark and delivered a rise in dividends that almost matched double-digit inflation. Good work for an elderly fund about to mark its 150th birthday.

In contrast to stablemates Scottish Mortgage (SMT ), Edinburgh Worldwide (EWI ) and Baillie Gifford US Growth (USA ), whose high-conviction growth strategies came unstuck and crashed below their respective indices last year, Scottish American – often referred to as Saints – stuck to a more balanced sustainable growth approach and avoided the 7.9% drop in the MSCI World index, although its portfolio of 64 dividend payers did fall 3.7%.

This was a reversal from 2021 when Saints achieved a total underlying investment return of 21.5%, beating the MSCI World’s 20%. 

But in a year in which all asset classes struggled against high inflation exacerbated by the war in Ukraine, it was a strong result testifying to the closed-end fund’s resilience as it prepares to celebrate its launch in 1873.

Despite annual swings in returns that would even have dizzied legendary jazz musician Louis Armstrong who famously recorded When the Saints Go Marching In in 1938, Scottish American’s long-term performance shows the benefit of a diversified portfolio, which includes more than 11% in property and bonds. The 7% allocation to real estate property is managed by Olim Property, the portfolio manager behind Value & Index Property Income (VIP ).

As of 15 February, Scottish American had generated a 194% total return over 10 years – while far less impressive than the 267% of rival JPMorgan Global Growth & Income (JGGI ) that’s still well ahead of its sector average and the MSCI World’s 183%.

Progress and suffering

Lord Macpherson, the trust’s chair, struck an optimistic note surveying its long history. In common with other long-standing investment trusts, Saints had, he said, endured two world wars, a cold war, hyperinflation, depression, numerous financial crashes, and ‘immeasurable human suffering’ from conflict, famine and disease.

However, these had been accompanied by ‘immense progress’ with the spread of modern democracy, dramatic increases in life expectancy, and widespread economic growth, notwithstanding humanity’s current existential threat to the planet from climate change.

‘And the key point for Saints is that throughout its history it has been able to take advantage of opportunities to invest globally in order to support and benefit from the tailwinds of economic, technological and even societal progress, and from geopolitical change, and to weather each storm and setback which has arisen,’ Macpherson said.

Alternative returns

Last year’s outperformance was striking because Saints portfolio managers James Dow (pictured above) and Toby Ross exclude oil and gas stocks, arguing their businesses are unsustainable in the face of climate and energy change. As a result, they missed out on short-term gains in the sector as shares shot up with the spike in crude prices after Russia’s invasion of Ukraine.

The pair, who also shun tobacco and arms manufacturers, which also did well in 2022, instead found gains from alternative sources ranging from healthcare, fizzy drinks, infrastructure and emerging market bonds.

The engaged investors also pressed US tech giants Apple (AAPL.O) and Microsoft (MSFT.O) to improve cybersecurity, privacy, and supply-chain management, and pushed courier UPS (UPS.N) to fully electrify its transport fleet, believing these initiatives will improve the businesses in the longer term.

In the short term, Danish insulin manufacturer Novo Nordisk (NVO.N) was a ‘standout performer’ for the trust after its appetite suppressant for obesity sufferers broke through, bringing the prospect of ‘considerable’ future earnings.

Greencoat UK Wind (UKW ) provided an acceptable way to benefit from rising carbon energy prices, with its revenues soaring from links to gas prices and inflation.

Pepsico (PEP.O) and Coca-Cola (KO.N) added some unexpected sparkle proving they could pass on rising shipping and packaging costs to consumers.

Fevertree (FEVR), however, lost its fizz, as soaring bottling and shipping costs to the US hit the premium tonic maker’s margins and halved the shares. Nevertheless, the managers have held on to the stock, believing earnings outside the UK will grow ‘enormously’ in the next five-to-ten years.

Big falls in the shares of US accounting software provider Intuit (ISRG.O), machine vision products maker Cognex (CGNX.O), both listed on Nasdaq, and French beauty group L’Oréal (OREP.PA) saw them snapped up as ‘attractive’ bargains.

By contrast, the pair lost conviction in and sold US truck broker CH Robinson (CHRW.O) and sanitary product manufacturer Kimberly-Clark de México (KIMBERA.MX) as the firms struggled with competition and a difficult economy.

They also exited UK consumer healthcare company Haleon (HLN) whose demerger from GSK (GSK) left it with weak brands and uninspiring sales prospects.

Hiscox (HSX) was dropped after a review provoked by the insurer’s dividend cut when the pandemic struck in 2020, its second axing of the payout in 20 years.

‘Arguably it should have dawned on your managers earlier that a company which insures its customers against losses in extreme events is unlikely to be a resilient distributor of dividends whenever those events transpire!’ Dow and Ross admitted.

Dividend not cut in 84 years

However, the overall picture on payouts from the 2.7%-yielding AIC ‘dividend hero’ was positive. Saints has grown its dividend ahead of inflation in the past decade, up 3.5% a year on average against the 2.7% annualised rise in consumer prices. Last year’s dividends were hiked by 9%, just short of a 10.5% increase, with a final dividend of 3.7p per share bringing the total for 2022 to 13.8p.

The increase came as the trust saw its earnings per share grow 8.1% to 13.82p, just covering the dividends, as companies lifted their payouts and Scottish American refinanced £80m of debts on a lower interest rate.

This is the 49th consecutive year Saints has raised the annual dividend, with the distribution not cut for 84 years. The last time it was cut was in 1938 when Armstrong recorded the aforementioned jazz version of When The Saints Go Marching In.

All of which makes the shares intriguing on a comparatively wide 4% discount to their net asset value. JP Morgan Cazenove analyst Christopher Brown said the trust had de-rated as investor confidence in growth strategies had faded, although he said Scottish American offered a steadier proposition than Baillie Gifford’s more concentrated global trusts such as Scottish Mortgage.

Nevertheless, Brown remained ‘neutral’ on the trust. ‘Our preference remains for companies with a more balanced approach between value and income,’ he said.