When the Scottish American Investment Company – also known as Saints – launched 145 years ago, its board was motivated to look beyond Britain’s shores to find returns to beat the pitiful 3.5 per cent interest offered by the domestic banks of the time.
The founding board’s first port of call was the United States where heavy investment was required to fund the nation’s ambitious railway building programme. Railroad bonds paying attractive yields were issued in their wagonloads.
While the US still represents the trust’s biggest market, the portfolio is now invested across the world with a focus on firms with good capital growth potential and providing dividend increases that beat inflation.
The fund has achieved the goal of rising dividends for nearly four decades in a row
Co-managers James Dow and Toby Ross have just completed filming for a video celebrating the rail origins of the trust (set on board the Eurostar to Paris). But it is a sign of the times – and the trust’s modern strategy – that railways no longer feature.
This is because the heavy investment required by these companies risks leaving less to distribute to shareholders. A key aim of the trust is to pay a consistent and growing dividend that at least beats inflation each year.
It has achieved the goal of rising dividends for nearly four decades in a row, including the past 15 years since current managers Scottish investment house Baillie Gifford took it over.
Dow says: ‘We are looking for companies that can offer growth as well as resilience of income – businesses that do not require heavy investment and so have good cash flow.’
By default the trust’s shopping list does not include much exposure to investment-hungry oil or telecoms operations, despite the fact these are a staple of rival high income funds. The potential risk involved in achieving the higher income is not to the managers’ tastes.
The founding board’s first port of call was the United States where heavy investment was required to fund the nation’s ambitious railway building programme
Among the names that have made the cut is Atlas Copco, makers of unglamorous air compressors. Dow says: ‘It sounds dull but it is a fantastic business. Over the last 15 years it has delivered a 19 per cent a year total return. That is exciting.’
B3, the Brazilian stock exchange and debentures operation, also cuts the mustard. The business is expanding from the public into the private sector and because it is an electronic software platform, its investment costs are not huge.
Dow says: ‘Two years ago the company reduced its dividend by 25 per cent to meet some loan repayments. But they paid down the loans quickly so our expectation is that the dividend will soon start to go up.’
Some dividend cutters do not get the same generous treatment. Dow says: ‘We sold MTN, a South African telecoms company recently when it appeared it was in a pickle with the regulators. We felt it was not as committed to the dividend as we thought.’
Dow says the trust, which has consistently outperformed a strong equity market, is proving popular with investors in the wake of new pension freedoms. Now that pensioners no longer need to purchase an annuity to fund their retirement, many are seeking other options for ‘reliable’ income – but that also have potential to grow their capital to see them through.
Patrick Connolly, of adviser Chase de Vere, says: ‘The philosophy of adopting a diversified approach and investing in companies which produce a reliable income but also have growth prospects, continues to hold the trust in very good stead.’