Investment trust Scottish American (LON:SAIN) underperformed its benchmark in the first half to June. Known as ‘SAINTS’, the global equity income fund’s underweight exposure to the semiconductor industry detracted from relative returns.
Nevertheless, the operational performance of SAINTS’ holdings remained ‘encouraging’. Broad-based earnings growth was generated across the equity portfolio.
And the Baillie Gifford-managed fund insisted it ‘remains on track to continue beating inflation’ and deliver its 53rd consecutive year of dividend growth.
Solid returns
For the uninitiated, SAINTS’ objective is to deliver real dividend growth by increasing capital and growing income. In H1, the trust generated a positive net asset value (NAV) total return of 5.6%, albeit one that lagged the 12.9% return from the FTSE All World Index.
SAINTS’ top-performing holdings were companies offering a play on the AI theme, including TSMC (TPE:2330), Analog Devices (NASDAQ:ADI) and MediaTek (TPE:2454). Yet SAINTS’ overall underweight exposure to the semiconductor industry detracted from relative returns.
Many chipmakers are poorly suited to SAINTS’ investment objectives. This is because they are low-yielders with often-volatile earnings, which means their dividends are rarely resilient.
Holdings in software and data businesses, including Accenture (NYSE:ACN), Experian (LON:EXPN) and Intuit (NASDAQ:INTU), also detracted from relative performance. This reflected the market’s concerns that these companies could prove to be AI losers.
However, SAINTS’ managers observe that these companies are continuing to deliver good growth in earnings and dividends, while increasingly embedding AI into their own products and services.
Buys and sells
During H1, SAINTS exited positions in companies where the investment case had deteriorated, namely T. Rowe Price (NASDAQ:TROW), Zoetis (NYSE:ZTS) and CME (NASDAQ:CME).
New investments include Texas-based bank Cullen/Frost (NYSE:CFR) and EOG Resources (NYSE:EOG).
SAINTS managers describe EOG as ‘a low-cost, conservatively financed cash-flow compounder in an industry where cost advantage and capital discipline matter enormously’.
Real income growth
Winterflood’s Emma Bird conceded shareholders will be disappointed that SAINTS has continued to underperform the broader global equity market.
Yet she stressed: ‘We would not expect it to outperform in a narrow market driven by low or zero-yielding stocks, given its aim to deliver real growth in capital and income over time and its commitment to not using capital reserves to achieve this.
‘The underlying holdings are generally delivering well in terms of earnings growth, while we also rate the managers’ dedication to undertaking regular reviews of every company in the equity portfolio, and they are willing to exit positions where the outlook has deteriorated.’
Bird sees potential for a turnaround in NAV performance ‘should market interest broaden significantly outside of the AI supply chain, which could well be accompanied by a re-rating from the current discount of 7%, which is notably wider than the Global Equity Income peer group.’
Disclaimer: The author (James Crux) owns shares in The Scottish American Investment Company.
Learn more about Scottish American here: https://www.bailliegifford.com/en/uk/individual-investors/funds/scottish-american-investment-company/
