B Gifford’s SAINTS fund returns 11.8%, manager moves

Baillie Gifford HQ in Edinburgh

Baillie Gifford’s £1 billion investment trust Scottish American Investment Company (SAINTS) reported that its share price total return was 8.2% and net asset value total return was 11.8% in the year to December 31, 2023.

The fund said its returns did not keep up with the FTSE All-World Index, which returned 15.7% over 2023.

The biggest investments made by SAINTS during the year included stakes in Novo Nordisk, Watsco, Microsoft, Fastenal, Partners Group, Taiwan Semiconductor Manufacturing, Atlas Copco, Procter & Gamble and Apple.

The fund said SAINTS’ share price return “has, in common with investment trusts generally, been affected by a broadening of discounts.”

SAINTS said Toby Ross is “stepping back from his role as manager of SAINTS to concentrate on his other responsibilities at Baillie Gifford.”

The fund said former Scotsman reporter James Dow will continue as a manager of the fund, with Ross Mathison as deputy manager “in the coming years.”

The fund’s full year dividend is 14.10p per share. This is 2% higher than the 2022 dividend, extending the company’s record of dividend increases to 50 consecutive years. 

Income was £30 million (2022 – £30m) and earnings per share were 13.48p (2022 – 13.82p).

SAINTS said its NAV total return (with borrowings at fair value) has exceeded that of both global equities generally and that of the global equity income sector over the past five and ten years.

In their managers’ review, Dow, Ross and Mathison wrote: “During the past few years it seems that some parts of the media have become, for want of a better word, hysterical.

“Even the financial press, which used to be renowned for walking a line between dry and tedious, has often joined the fray of shouty headlines and breathless articles.

“This is understandable. Technology has disrupted the business models of traditional media channels. In a digital world, whoever conjures the most shocking headlines will gather the most clicks. And whoever accumulates the most clicks might be able to keep their jobs …

For the long-term investor, who is earnestly attempting to grow their capital and income over a period of many years, this hysteria is unhelpful. 

“It is rather like trying to hold a conversation at a dinner-party while being repeatedly interrupted by a drunken guest, who veers endlessly between loud euphoria and wallowing self-pity. An unfortunate distraction.

“Over the multi-year periods that matter to serious savers and investors, stock prices and dividends tend largely to follow company earnings.

“The key task for portfolio managers, therefore, is to identify companies with strong prospects of growing their earnings over many years. These prospects are unlikely to be affected by the monthly mood swings of the media. It is a job best done when sober.

“We keep this long-term perspective in mind when we look back at 2023. In the headlines it was a year of enormous ups and downs. But what about the investments in SAINTS’ portfolio? Did they largely deliver in-line with our long-term expectations for their growth in earnings and dividends? 

“The short answer is: yes. The more nuanced answer is that some grew faster while others saw earnings fall. But in almost every case we are satisfied that their long-term growth remains on-track. We expect this to drive continued compounding in capital and dividends in the years ahead …”

The managers added: “One of the standouts from the portfolio was Atlas Copco, the global compressor and industrial tool business, based in Sweden.

“This well-managed company is religiously focused on innovation to drive growth, and it is always on the look-out for strong niche businesses to acquire …

“Other strong performers in the equity portfolio last year included Watsco, the heating, ventilation and air conditioning distributor, and Fastenal, the industrial equipment distributor …

“Novo Nordisk, the Danish pharmaceutical company, was another highlight of the year. Its pioneering medicine for appetite control, which its scientists have spent years investigating, whilst running clinical trials of thousands of patients to establish that it is both effective and safe, has resulted in significant earnings growth at the company …

Not all of our investments will, of course be successful. We try hard to be patient, as long-term managers, but sometimes it becomes apparent that our investment case is simply wrong, and that growth is not materialising to the extent we hoped. 

“In these cases we will divest, and put the capital to work in better companies. A small number of holdings had a weak 2023 that could not be excused by any cyclical headwind. In some cases our review of them led to a re-evaluation of their future prospects. During the year we divested from six holdings. 

“One of them was Want Want, the Chinese rice cracker and soft drink manufacturer. It had been a disappointing investment, with low earnings growth over a number of years. At first we thought this was due to temporary input cost pressure, impacting margins, and we patiently maintained our investment while the company put in place a number of actions to restore profits and growth.

“Over time, however, we recognised a more concerning issue. The board seemed to have become too focused on short-term profits, which had made the company slow to recognise changing consumer preferences in China.

“It had resisted a shift towards modern distribution channels, and had failed to develop key new products. After visiting the company in China during 2023, and seeing limited prospects for change, we sold the position.

“We also sold SAINTS’ holding in Cullen Frost, the US regional bank. When we invested several years ago our hope had been that continued growth in the population of Texas, which like most ‘SunBelt’ states is experiencing steady inflows of people, combined with the bank’s huge deposit base and strong brand, would allow Cullen Frost to grow its loan book and earnings substantially. 

“But progress has been frustratingly slow, with intense competition in the local market. At the start of 2023 the fragility of the US banking system was highlighted by a series of local bank runs. Cullen Frost was not directly affected, but it changed our view of the risk-reward ratio: limited growth, with the potential for the equity to be wiped out.  We moved on.

“National Instruments was the third complete sale. This followed a very attractive bid for the company, which caused the share price to shoot up. We saw little advantage in waiting for the deal to complete, so divested from the shares. 

“It was a similar story at Silicon Motion, where the share price rose following an acquisition approach. The bid then became mired in regulatory issues and we decided to divest, even though the share price was somewhat below the bid price. The bid was later withdrawn and the share price fell, so this has turned out to be a profitable decision.

“The fifth divestment was Linea Directa, the Spanish insurance company. The shares have proven to be highly illiquid since we invested two years ago, which meant we struggled to make this into the size of holding we envisaged. With no plan in sight from the company to help improve liquidity, we decided to divest the holding.”