Baillie Gifford’s £1 billion investment trust company Scottish American Investment Company (SAINTS) reported that its net asset value (NAV) total return of 6.1% “significantly lagged” the 19.8% total return of the FTSE All-World Index in the year to December 31, 2024.

SAINTS, managed by former Scotsman reporter James Dow and colleague Ross Mathison, said its share price total return of -4.2% was “adversely affected by a widening discount.”

Dow and Mathison wrote: “On the positive side of the ledger, growth in earnings across the company’s portfolio was strong. The backbone is our investment in equities, where dividend growth was robust. Income from the property, infrastructure and bond portfolios was also solid.

“Together, these investments drove growth in the company’s earnings per share, lifting it 7.6% above the prior year. This strong result underpinned another inflation-beating increase in SAINTS’ dividend to shareholders …

“On the negative side of the ledger, the NAV growth of the company lagged global equity markets, as measured by the FTSE All-World, by some way. Worse, the share price did not follow the NAV, as the discount widened over the course of 2024, finishing the year at 10.6%.”

SAINTS’ objective is to deliver “real dividend growth by increasing capital and growing income.”

The investment trust company is recommending a final dividend which will take total dividends for the year to 14.875p per share, an increase of 5.5% over the previous year.

The biggest holdings of SAINTS at December 31 included Microsoft, Fastenal, Apple, Procter & Gamble, Taiwan Semiconductor Manufacturing, Partners Group, Deutsche Boerse, Schneider Electric, Watsco, Novo Nordisk, Coca Cola, Pepsico, Analog Devices and McDonald’s.

Nicholas Macpherson, chairman of the fund, wrote: “When the biggest companies in the world index perform strongly and are concentrated in the technology sector, and when the most cyclical companies also perform well, life is challenging for portfolios with a focus on high quality and predictably cash generative businesses.

“Last year’s pattern of performance is unusual, despite the fact that it is a continuation of a phase which began in 2023. And, as last year, the companies which have dominated the market are a handful of very large and generally low yielding technology companies in the US.

“This is not a backdrop which has favoured the total return performance of your Company. SAINTS’ emphasis on steady earnings growth and dependability has led to continued strong operational performance and helped revenues to grow ahead of inflation, but NAV performance, though positive, has been disappointing relative to the market.

“There are two principal reasons that SAINTS’ NAV performance has lagged. First, our emphasis on income, and on dependability and reliability, has led us to avoid many AI related stocks and also many cyclical stocks and sectors which have performed well this year as markets have become more optimistic.

“In contrast, the market has come to the view that, amidst the uncertainty and strategic ambiguity of the new U.S. Presidency, those technology companies which are currently delivering strong growth are the place to be invested.

“Secondly, SAINTS also invests in asset classes other than equities, principally property and bonds, which bring advantages in terms of diversification and income resilience but have not kept up with equities in a period of high interest rates …”

The company reported: “The increase in the dividend is 3% ahead of inflation over the year, and is supported by earnings per share growth of 7.5% over the year,” said the company.

“SAINTS’ dividend has also grown at 3% per year ahead of inflation since 1938, the last time the dividend was cut more than eight decades ago.

“Whilst operational performance at SAINTS’ holdings has been encouraging, SAINTS’ emphasis on dependable earnings and dividend growth over the long term has been out of favour in a year in which market concentration, and very strong returns from certain low yielding and large technology related stocks and from cyclical companies such as banks, have been significant features.

“Over the year SAINTS’ NAV total return (borrowings at fair value) of 6.1% has significantly lagged the market’s return of 19.8%, and the share price total return of -4.2% has been adversely affected by a widening discount.

“However, SAINTS’ capital continues to grow, and during the year SAINTS’ NAV per share reached a record level.

“SAINTS’ NAV total return over the last ten tears has been 8.6% per annum, which compares with the Global Equity Income sector’s return of 4.7% per annum over the same period

“The board continues to have confidence in the company’s investment strategy, but takes the widening of the discount seriously and has embarked on a share buyback programme.”

SAINTS fund managers James Dow and Ross Mathison wrote: ” …we believe it would be unwise and perhaps even irresponsible for SAINTS to invest an index-like 70% of capital solely in the US market. The result would be significantly lower income, with significantly higher risks, while missing out on many good companies which fit better with SAINTS’ objectives elsewhere in the world.

“The flipside of all this though is that in years like 2024, when the US market is rocketing, and other markets such as Europe and Asia are rising less strongly, the NAV performance of SAINTS will inevitably lag its benchmark.

“This was one part of SAINTS’ under-performance of the FTSE All-World in 2024.

“But there was a second major factor. This was the specific type of investments that SAINTS owns. Share prices of many of SAINTS’ investments, companies such as Watsco, Analog Devices and Procter & Gamble, lagged the wider US market.

“These resilient long-term compounders, which we favour for SAINTS’ income and capital growth objectives, were deeply out of favour within the US stock market last year. The best-performing US stocks were cyclicals such as banks, which benefited from a reversal of expectations from a ‘hard’ to a ‘soft’ landing in the US economy, and so-called ‘Big Tech’ stocks, where investors poured capital into names such as Nvidia, the AI chipmaker.

“These types of company are usually a poor fit for SAINTS’ objectives. They tend to be highly cyclical dividend payers, if they pay a dividend at all. For example, at Nvidia, as we noted in this year’s interim report, there is a significant risk of a sharp downcycle in earnings if customers find ways to pursue gains in AI through optimisation, rather than ever-more hardware. This cyclicality and the lack of a meaningful dividend makes Nvidia unsuitable as an investment for SAINTS, and recent newsflow has done nothing to alter our view on its suitability.

“Or to take another example of the type of US company which fared well last year, we can observe the rise of Tesla, the carmaker. Again, this is both a cyclical company and a member of the ‘Magnificent Seven’ technology stocks, and its share price appreciated rapidly last year. But again, it is a volatile, capital-intensive business model, and it does not pay a dividend.

“Shares in these kinds of company fared well in 2024, while the likes of Procter & Gamble, with its 134 years of consecutive dividends, and highly resilient earnings growth, under-performed the wider US market.

“Our intention is to continue focusing squarely on SAINTS’ objectives for the long-term. There are many great US companies that we can invest in, names which are a strong fit with our goal of inflation-beating income growth with resilience. Indeed, there are 20 such US names already in the equity portfolio, including the likes of Microsoft and Apple (both top ten positions) as well as lesser known names such as Fastenal the industrial distribution company, and Cognex the factory automation company.

“We continue to scour the US market for new ideas, last year completing several research trips across the States that yielded exciting new holdings such as CME Group (more on this in the Transactions section). We do not plan to chase short-term momentum in the stock market, and we will continue to avoid deeply cyclical companies with high technology risk or low dividend payout ratios. We do not plan to allow SAINTS’ country and currency risk at the portfolio level to come anywhere close to the benchmark’s 70% US exposure.

“Finally, we should acknowledge that some of SAINTS’ holdings have disappointed for stock specific reasons. This is typically the case in an actively managed portfolio, as our analysis is not always correct, active management includes an assessment of outcomes which we believe are probable but know are not certain, and progress is not always smooth.

“This year for example the share price of B3, the Brazilian Stock exchange, has been adversely affected by sentiment towards Brazil, and Novo Nordisk has seen mixed results from some trials for its weight loss treatments. In both cases we continue to have confidence in the long-term prospects for growth. In other cases, as illustrated in the transactions section below, we have sold the shares where we believe that long term prospects have deteriorated.

“SAINTS’ style and structural-bias has been painful in terms of relative NAV performance over the past year in particular, and this in turn has adversely affected SAINTS’ long-term numbers. But we neither aim to, nor expect to, outperform the market in every annual period, although interestingly SAINTS has outperformed in eight of the last ten calendar years.

“Looking forward we are encouraged by the operational (as opposed to share price) performance of your holdings, and remain convinced that a balanced portfolio of 10% compounders, split roughly evenly between the US, Europe and the rest of the world, is the most surefire way to achieve SAINTS’ objectives … “