Scot.American Inv. - Scottish American Investment Co Final Results
10/02/2023 07:00
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RNS Number : 5135P Scottish American Investment Co PLC 10 February 2023
RNS Announcement
The Scottish American Investment Company P.L.C.
Legal Entity Identifier: 549300NF03XVC5IFB447
Regulated Information Classification: Additional regulated information
required to be disclosed under the applicable laws and regulations.
The following is the results announcement for the year to 31 December 2022
which was approved by the Board on 9 February 2023.
¾ Dividend - The full year dividend, including a recommended final dividend
of 3.67p, is 13.82p per share. This is 9% higher than the 2021 dividend and is
fully covered by earnings. The recommended dividend will extend the
Company's record of dividend increases to forty nine consecutive years.
¾ SAINTS aims to grow its dividend ahead of inflation over the long term.
Over the past ten years SAINTS has increased its dividend at an annualised
rate of 3.5%, which compares with UK CPI of 2.7%.
¾ Revenues - Income was £30.0m (2021 - £28.0m) and earnings per share
were 13.82p (2021 - 12.79p).
¾ Total return* - Net Asset Value total return (capital and income with
borrowings at fair value) for the year was negative 3.7%, ahead of the total
return from global equities of negative 7.3%. The share price total return was
negative 3.5%. Returns were assisted by the resilient operational performance
of many of the companies in which SAINTS invests, and also by positive returns
from the Company's infrastructure equity and bond investments.
¾ SAINTS also aims to deliver attractive returns over the long term -
SAINTS' NAV total return (with borrowings at fair value) has exceeded that of
equities generally over the past three, five and ten years. SAINTS is also the
best performing fund in its Global Equity Income peer group, in terms of share
price total return, over the past five years.
¾ Outlook - The Board remain of the view that a long-term approach based on
investing globally for sustainable growth is the best route to achieving
SAINTS' aims. In addition, we are encouraged that the Managers have continued
to find new and attractive opportunities amidst the recent turmoil. We retain
great confidence in the Managers' approach, and this confidence has been
further strengthened by the experiences of the past year.
* See Glossary of Terms and Alternative Performance Measures at the end of
this announcement.
Source: Refinitiv/Baillie Gifford and relevant underlying index providers.
SAINTS' objective is to deliver real dividend growth by increasing capital and
growing income. Its policy is to invest mainly in equity markets, but other
investments may be held from time to time including bonds, property and other
asset classes.
The Company is managed by Baillie Gifford, the Edinburgh based fund management
group with around £246 billion under management and advice as at 9 February
2023.
Past performance is not a guide to future performance. SAINTS is a listed UK
company. As a result, the value of its shares and any income from those shares
is not guaranteed and could go down as well as up. You may not get back the
amount you invested. As SAINTS invests in overseas securities, changes in the
rates of exchange may also cause the value of your investment (and any income
it may pay) to go down or up. You can find up to date performance information
about SAINTS on the SAINTS' page of the Managers' website saints-it.com
(http://www.saints-it.com) . Neither the contents of the Company's website nor
the contents of any website accessible from hyperlinks on the Company's
website (or any other website) is incorporated into, or forms part of, this
announcement.
For further information please contact:
James Dow and Toby Ross, Managers, The Scottish American Investment Company
P.L.C.
Tel: 0131 275 2000
James Budden, Baillie Gifford & Co
Tel: 0131 275 2816 or 07507 201208
Jonathan Atkins, Director, Four Communications
Tel: 0203 920 0555 or 07872 495396
Chairman's Statement
SAINTS' objective is to deliver real dividend growth by increasing capital and
growing income. The Board is recommending a final dividend which will bring
the total dividends for the year to 13.82p per share, an increase of 9% over
the previous year. The Company continues to meet its objective of growing
dividends ahead of inflation over the long term, and the recommended dividend
will also extend the Company's record of raising its dividend to forty nine
consecutive years.
Overview
2022 has been another difficult year for the world, a period in which equity,
bond and property markets have all been weak. As the challenges from Covid-19
receded those arising from the Russian invasion of Ukraine increased. The
economic recovery from the worst of the pandemic has been more tentative than
expected, in large part due to resurgent inflation. With hindsight, central
banks were too sanguine about inflationary pressures in 2021, and the energy
price shock arising from the Russian invasion pushed inflation to levels not
seen in 40 years. As a result, central banks have had to raise interest
rates much higher than expected a year ago. The retreat from globalisation has
continued, with trade barriers increasing as countries seek to protect their
supply chains in the face of greater geopolitical risks. Closer to home,
political missteps eroded confidence though as the year drew to a close there
were signs of greater calm and stability.
On the positive side, industrialised economies have shown extraordinary
adaptability in the face of the energy shock. Oil and gas prices have fallen
recently, creating a more benign outlook for inflation. And the world economy
is set to grow in 2023.
Against this background, I am pleased to report that SAINTS has continued to
perform well. The refinancing of the Company's long term debt at a rate
pre-arranged two years earlier has significantly reduced borrowing costs, and
the Company's earnings per share have risen at a rate which has enabled the
Board to recommend a very significant increase in the dividend. Furthermore,
SAINTS' NAV total return (with borrowings at fair) has exceeded that of the
global equity market, despite the managers deliberately eschewing many
companies such as those in the energy sector which have been short term
beneficiaries of the war in Ukraine, but which they do not believe will
support the achievement of SAINTS' objective over time.
More importantly however, given the long-term nature of the Company's
objectives, it is worth emphasising both SAINTS' successful record of raising
its dividend ahead of inflation over the long term, and the strong total
returns it has delivered.
SAINTS 150(th) Anniversary
This year, SAINTS reaches the one hundred and fiftieth anniversary of its
formation in 1873. And, consistent with the Company's focus on the long
term, it is perhaps useful to provide some historical perspective. In that
year, for example, the Emperors of Russia, Austro-Hungary and Germany formed
an alliance to stand against radical thinking. It might be easier to list what
remains constant rather than what has changed since then, but amongst other
things those three Empires and those of Britain and Japan have passed into
history, as have the Third Reich and the USSR. There have been two world wars,
a cold war, hyperinflation, a depression and numerous financial crashes, and
immeasurable human suffering, much of it arising from conflict, famine and
disease.
Yet over these one hundred and fifty years the world has made immense
progress, in everything from the advent and spread of modern democracy, to a
dramatic increase in life expectancy and the many benefits of human and
technological progress. The US has grown to be the world's most powerful
country, and it and almost every other country have industrialised. Of course,
progress brings its own challenges, some of which relate to global and other
inequalities and some to our planet and its climate. But we should hang on to
the fact that economies generally grow. 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.
It is also worth emphasising that SAINTS is particularly well equipped to
navigate stormy seas, both because of its structure and also because of its
managers' focus on selecting individual investments to provide dependability
and growth. We very much hope that SAINTS' 150(th) anniversary year will also
be its 50(th) successive year of dividend growth. Indeed, the dividend has not
been reduced year-on-year since 1938. The prudent use of revenue reserves has
been an important part of this success, but so too has investing in companies
and other assets which provide an income which is resilient in tough times and
grows above inflation over the long term.
To mark SAINTS' 150(th) anniversary, and to help provide the benefit of
perspective which I mentioned above, the Board and Baillie Gifford have
commissioned a short history of SAINTS. We expect this to be available, in
both electronic and hard copy form, by late May/early June. If you would like
to receive a copy, either by email or in physical form, please request a copy
using the following link: bailliegifford.com/SAINTS150
Dividend and Inflation
The Board recommends a final dividend of 3.67p which will take the full year
dividend to 13.82p per share, 9% higher than the 2021 dividend of 12.675p.
The strong growth in SAINTS' revenues over the past year has enabled this
greatly increased dividend to be covered by earnings. Whilst significant, the
rate of increase does not match the annual rate of inflation of 10.5% as
measured by CPI. It remains the Company's objective to deliver real dividend
growth over the long term, and over the last ten years the Company's dividends
have in the round increased at a rate (3.5% per annum) which has been well
above the rate of inflation (2.7% per annum).
We would mention also that the Board does not necessarily expect to exceed or
match the level of the previous quarter's dividend in each successive quarter.
It is quite possible, therefore, that not all dividends next year will match
or exceed this year's final dividend.
Revenues
Earnings per share have risen to 13.82p over the year, an increase of 8.1%,
and investment income has risen to £30m. Income from equities has been helped
by operational progress at many of the Company's investments and by increases
in their dividends, as well as by movements in exchange rates. The sale of
four properties and the purchase of one led to a reduction in rental income.
Both managers (Baillie Gifford and, for the Company's property investments,
OLIM) continue to focus on supporting the dependability and the future growth
of the Company's dividend in line with its objective.
Total Return Performance
In a challenging year your investment in SAINTS delivered a share price total
return of negative 3.5% and the net asset value total return (capital and
income with borrowing at fair) was negative 3.7%. Although a positive return
would have been preferable, in the circumstances this is a creditable result.
Although as always we would caution against reading too much into short term
performance, it is worth noting a number of positive features over the year.
Firstly, the share price and net asset value returns once again exceeded that
from global equities which was negative 7.3% over 2022. And secondly, the
performance of SAINTS' investments in equity, property, infrastructure, and
fixed income investments all compared favourably with that of their respective
asset classes.
The Managers and your Board have a long-term perspective and the Company's
portfolio of investments differs markedly from the make-up of the global
equity index against which performance is often compared. This differentiated
portfolio is necessary and appropriate in order for SAINTS to deliver a high
and growing income stream, as well as growth in the Company's assets. We would
therefore encourage shareholders to assess your Company's performance over the
long term. SAINTS remains at the top of its sector in terms of share price
total returns over the past five years and has also outperformed equities as
measured by its global equity benchmark over the past three, five and ten
years.
The principal contributors to and detractors from performance and the changes
to the equity, property and bond investments are explained in more detail in
the Managers' Review.
Borrowings and Debt Refinancing
During the course of 2022, the larger part of the Company's borrowings were
refinanced at a rate agreed some two years earlier and so, in an environment
when interest rates have been rising, the cost of the Company's borrowings has
fallen very significantly.
At the start of the year SAINTS' borrowings took the form of a single £80m
debenture, and a further £15m of borrowing which had been added in 2021. The
debenture dated from a time when the prevailing interest rates were much
higher than today, and bore a coupon of 8%. The £80m debenture matured in
April 2022 and, as previously announced, the Company issued £80m of long-term
private placement debt to refinance its long-term borrowings. At this time,
the overall cost of the Company's borrowings, including the additional £15m
raised in 2021, fell to just below 3% per annum. The refinancing of the
Company's long-term debt appears well timed and, in the Board's judgement, the
Company is now well placed to use its borrowings to enhance returns and
support its dividend.
The book value of the total borrowings is £94.7m which, at the year end, was
equivalent to approximately 11.2% of shareholders' funds. The estimated market
or fair value of the borrowings was £65.5m, a decrease from the previous
year's value of £97.4m due to the general increase in interest rates and bond
yields.
Environmental, Social and Governance (ESG)
I have already alluded to some of the challenges which the world is facing
and, in this context, it is important to emphasise that the Board of SAINTS
recognises the importance of considering Environmental, Social and Governance
(ESG) factors when making investments, and in acting as a responsible steward
of capital. We consider that Board oversight of such matters is an important
part of our responsibility to shareholders, and the Board has recently
reviewed and strengthened its ESG Policy which is available to view on the
Company's website (saints-it.com).
The Board has been strongly supportive of the Managers' approach, and of their
constructive engagement with the companies you own over the course of the
pandemic, and in their engagement with holdings and potential holdings in
relation to other areas including climate change. I would encourage
shareholders to read SAINTS' annual Stewardship Report which can also be
accessed on the Company's website (saints-it.com). There is also further
detail in the Managers' Review, which includes a section on investing
sustainably.
Issuance and buybacks
Over the year the Company has raised £5.9m from new share issuance, at a
premium to net asset value prevailing from time to time in order to satisfy
investor demand. This is the eighth year in a row when the Company has been
able to issue shares. Such issuance serves the interests of existing
shareholders by enhancing net asset value, reducing costs per share and
helping further to improve liquidity. No shares were bought back during the
year.
The Board
As planned, Peter Moon stepped down from the Board at the conclusion of last
year's AGM. We once again thank him for his many years of invaluable service,
both as a Director and as Chairman. As previously announced, Bronwyn Curtis
took over as Senior Independent Director when I became Chairman, and Christine
Montgomery joined the Board on 6 April 2022.
Outlook
Equity and bond markets were weak last year, and other markets including
property have also experienced difficulties. As 2023 gets underway, there are
tentative signs of hope triggered by lower energy prices and reduced interest
rate expectations. It is too soon to know whether the worst is behind us:
government finances remain under pressure and many companies will struggle to
grow their earnings and protect their balance sheets in the face of slow
economic growth. However, with asset prices adjusting, there will be buying
opportunities, and maintaining a focus on the strength and resilience of
individual investments remains as important as ever.
As a Board, we believe a long-term approach based on investing globally for
sustainable growth is the best route to achieving SAINTS' aim of growing the
dividend ahead of inflation over time. In addition, we are encouraged that, as
is outlined further in the Managers' Review, they have continued to find new
and attractive opportunities amidst the recent turmoil. We retain great
confidence in the Managers' approach, and this confidence has been further
strengthened by the experiences of the past year.
Proposed Change to Articles of Association
Your Board is proposing certain changes to the Company's Articles of
Association which, amongst other things, will permit SAINTS to hold virtual or
electronic Annual and Extraordinary General Meetings, as well as physical and
hybrid meetings, in the future. Thankfully the worst of the current pandemic
seems to be behind us, but we believe it would be sensible to ensure that in
similar circumstances the Company would be able to use modern technology to
carry out meetings in a timely fashion, whilst also allowing shareholders and
others who could not attend in person to take part. A summary of these
proposed changes, together with other changes being proposed as part of an
overall update to the company's constitutional documents, is set out in more
detail in the AGM section of the Directors' Report. For the avoidance of
doubt, the Board's preference will always be to hold physical general meetings
where it is possible to do so.
AGM, Presentation and Drinks
The AGM will be held at 11.30am on Thursday 6 April 2023 at Baillie Gifford's
offices at Calton Square, 1 Greenside Row, Edinburgh. The meeting will be
followed by a presentation from the managers. Shareholders are cordially
invited to attend the meeting and presentation, and also to join the Board and
the Managers for drinks afterwards in celebration of the Company's first one
hundred and fifty years.
I would remind shareholders that they are able to submit proxy voting forms
before the applicable deadline and also to direct any questions or comments
for the Board in advance of the meeting through the Company's Managers, either
by emailing trustenquiries@bailliegifford.com or calling 0800 917 2112
(Baillie Gifford may record your call).
Finally, my fellow Directors and I send you all our very best wishes for your
health and happiness in the year ahead.
Lord Macpherson of Earl's Court
Chairman
9 February 2023
For a definition of terms see Glossary of Terms and Alternative Performance
Measures at the end of this announcement
Source: Refinitiv/Morningstar/Baillie Gifford and relevant underlying index
providers. See disclaimer at the end of this announcement.
Past performance is not a guide to future performance.
Managers' Review
In 2022 the per share earnings of The Scottish American Investment Company
increased by a little over 8%, while the per share net asset value (NAV total
return with borrowings at fair value) decreased by 3.7%. Since the start of
2004, which is to say when the present managers were appointed by the Board,
the NAV has compounded at 5.4% per annum, growing shareholders' capital from
181.9p to 495.5p.* Over the same period the NAV total return of the Company,
meaning the capital gain with dividends reinvested, has been 8.4% per annum.*
Dividend growth in 2022 was 9.0%, taking the compound increase since 2004 to
4.8% per annum, ahead of inflation† over the same period of 2.7%.
In what follows below, we reflect on how SAINTS' portfolio coped with a slew
of shocks during 2022: war in Europe, soaring prices worldwide, and a sharp
rotation in equity markets away from 'growth' towards 'value'. We shed light
on some of the individual holdings that delivered notable positive and
negative performance, and we elaborate on the new investments (and
dis-investments) that we made during the year.
A brief update is also included on our progress in diversifying the Company's
non-equity investments, which took place as SAINTS' borrowings were refinanced
to a lower rate of interest. We then offer some comments under the broad
heading of 'investing sustainably', something we believe is vital for the
long-term compounding that we seek to deliver in shareholders' capital and
dividends. We finish with our outlook for 2023 and beyond.
For those who would prefer to cut to the chase, the abbreviated version goes
like this: although 2022 felt rather like sailing through a storm, with waves
crashing left and right and visibility poor, SAINTS' portfolio proved
pleasingly robust and charted a relatively steady course. The strong companies
that constitute the backbone of the portfolio delivered, for the most part,
admirably solid compounding in their revenues and profits. The portfolio also
generated dividend growth that broadly kept pace with inflation, ensuring
shareholders' real income was largely maintained.
The Company's property, infrastructure and fixed income investments also held
up relatively well. SAINTS has been able to refinance its borrowings, and the
Company's overall borrowing cost has now fallen to 3%, having previously been
8%, which will be a substantial saving going forward.
Credit for this steady performance should perhaps go more to the seaworthiness
of the ship than the skill of its captains: the quality of the holdings shone
through rather than any change of course by its managers, given that we made
only three new equity investments during the year. But the bottom line is
that SAINTS' shareholders own a portfolio that proved its mettle in 2022 and
appears well set for the future. The outlook for the global economy is showing
tentative signs of improvement, and as managers we remain optimistic about
delivering steady growth in earnings and dividends in 2023 and beyond.
Coping with the shocks of 2022
It seems fair to say that the 2020s, as decades go, have so far proved a
little… challenging. It is chastening to recall that as this decade
dawned, many hoped the world was on the cusp of another "Roaring 20s":
repeating the same decade a century earlier when peace reigned, prosperity
boomed, and investments soared in value. That scenario has not, to put it
politely, quite transpired. Each of the past three years has brought huge
challenges to citizens around the world, including investors seeking capital
growth with dividends. The year 2022 was no exception, thanks to a senseless
war in Europe, the return of double-digit inflation triggering rapid rises in
interest rates, and a stock market that turned its nose up at growth-oriented
companies.
As managers of SAINTS it is our job to build a portfolio that can thrive
through thick and thin, whatever storms it may encounter. If economic
activity is collapsing because of the first global pandemic in living memory,
or if the Chinese economy is slumping while global energy prices are spiking
to extraordinary levels, it is our job to ensure the Company's portfolio
contains investments that can navigate those adversities successfully.
Happily, this is indeed how the portfolio and most of its underlying
investments performed last year. At the time of writing we are still receiving
the final results for 2022 from the circa 60 holdings in the equity portfolio
that form the backbone of the Company's NAV, but broadly-speaking we can say
that it was a year of solid earnings and dividend growth. The decline in the
Company's NAV was attributable largely to a broad decline in listed equity
valuations, as markets adjusted to higher-than-expected future interest
rates. But fundamentally, the vast majority of SAINTS holdings continued to
perform well operationally, and this is why they delivered steady earnings and
dividend growth.
Growth-oriented companies in general bore the brunt of an adjustment in the
stock market last year to higher interest rates, with a huge rotation taking
place in favour of so-called 'value' companies. These are companies which
typically trade on low multiples of price to earnings, reflecting their poor
long-term growth prospects, but over short periods they can come into favour.
A good example is the oil & gas business, where SAINTS has no capital
invested. In 2022 many oil & gas companies saw their share prices marked
up significantly, as the war in Ukraine prompted sanctions on Russian exports,
in turn causing energy prices to spike and profits at oil & gas companies
to balloon. In the long-term, we believe these companies are likely to prove
poor sources of capital and dividend growth for shareholders, because they are
likely to see demand for their products shrink quite considerably as energy
users around the world make stringent efforts to de-carbonise their
operations. Last year, however, many oil & gas companies saw their share
prices increase.
Meanwhile, many companies with attractive long-term growth prospects fell out
of favour. An example is the soft drinks company Fevertree Drinks, which is
a holding in SAINTS' portfolio. As managers we believe that Fevertree's
earnings outside the UK have a strong chance of growing enormously over the
next 5 to 10 years. But in the past 12 months the price of gas has
dramatically increased the costs of the company's glass bottles, and expenses
have soared too for the containers it uses to ship its products around the
globe while it is still building local facilities in countries like the US.
Its profit margins have therefore fallen and the stock market has punished its
share price.
This is the kind of headwind that a number of SAINTS holdings had to deal with
in 2022. Our investments in Chinese companies are another example where we saw
short-term pain: COVID lockdowns hurt the earnings of companies such as Anta
Sports (the footwear maker) and Man Wah (the furniture maker) in 2022, and
their share prices fell significantly as the market's risk-aversion increased
and time horizon shrank.
When we look through the list of holdings whose prices have been marked down
by the stock market, however, our belief is that the vast majority have been
impacted by challenges that are likely to prove short-term. We have already
seen energy prices fall in the past few months, to the point that, remarkably,
the European gas price has now declined below its level before the invasion of
Ukraine. China has started "unlocking" and its government has begun a
stimulus programme.
We would much rather invest shareholders' capital in companies with good
long-term growth prospects, and wait for these storms to pass, than invest in
the likes of oil & gas companies where, to the best of our judgement, the
long-term outlook for growth in their earnings and dividends is very poor. In
the medium-term we expect interest rates and equity valuations to stabilise,
while the portfolio's earnings should continue to compound higher. Ultimately
this should drive growth in SAINTS NAV and dividends in the years to come.
While a small number of holdings had a difficult 2022, it is important to put
these in context. As managers we have been struck more by how, faced with
crashing waves and howling winds, the vast majority of the companies in SAINTS
portfolio have continued to deliver solid earnings and dividend growth.
Particular mention should be made of a few.
Notable positive performers
SAINTS' standout performer last year was Novo Nordisk, the Denmark-based
manufacturer of insulin for diabetics which has also begun making, more
recently, appetite suppressants for patients who are battling obesity. This
has been a very successful investment for shareholders over the past several
years. Revenues have compounded steadily upwards, driven in part by
continued growth in the number of patients diagnosed with diabetes, a
condition which remains under-treated but where happily detection is
increasing over time. We remain optimistic about seeing continued progress
worldwide in the years ahead. Meanwhile, novel formulations of the company's
insulin products have made life significantly easier for many of those living
with diabetes: for example the company's oral formulations which spare
patients from the burden of constant injections. This innovation has been
rewarded by higher prices, which again has driven revenue growth.
More recently, the use of the company's semaglutide molecule as an appetite
suppressant has been hailed as a breakthrough treatment for patients battling
obesity. Future earnings growth from this innovation could be considerable,
and shares in the company have risen accordingly. We are mindful of the higher
valuation of the shares following this strong period of performance, but
believe we are still early in the multi-year opportunity for Novo Nordisk to
change people's lives for the better, while growing the company's earnings and
dividends. In the meantime, we continue to liaise with the management team to
ensure that, despite rocketing demand for the company's treatments, it is
pricing its products honourably (not gouging) and that it is working as hard
as possible to add safe new capacity to meet patient demand.
Our several investments in consumer staples companies, such as Pepsico and
Coca-Cola, also by-and-large performed well during 2022. Over the past several
years these companies have delivered solid growth but, candidly, the rate of
growth has not always been particularly inspiring. However in 2022, with input
costs rising sharply, for example due to transportation costs, and with
considerable ongoing investments to reduce their packaging impact and improve
their nutritional impact, these companies have been able to pass on cost
inflation to consumers seeking improved products. Earnings and dividends have
continued to compound higher and their share prices have risen, as the outlook
for profit growth has brightened.
The performance of these holdings illustrates a wider point about SAINTS
portfolio, that is perhaps under-appreciated. As managers, we make conscious
efforts to ensure that we achieve true diversification when investing
shareholders' capital. Not just by investing in different countries and
industries, but also in terms of different types of growth case, and business
model, and assorted exposures to different macro factors.
We do all this in pursuit of dividend resilience and steady compounding. We
try hard to ensure that we are not "betting the portfolio" on a narrow range
of businesses or styles. We are far from perfect in this respect - earnings
correlations have a nasty habit of rising toward 100% whenever severe shocks
occur - but it does mean that in highly volatile years such as 2022, SAINTS
portfolio by design includes names which may perform unusually well while
others are slowing. Our consumer staples holdings just-mentioned, and our
two bank holdings United Overseas Bank and Cullen/Frost Bankers, together with
esoteric names such as Edenred (the vouchers business), Arthur J Gallagher
(the insurance broker), USS (the Japanese car auctions business), and Deutsche
Boerse (the German derivatives exchange) are all testament to this approach.
Many featured in our top 10 performers list for 2022.
New equity investments and dis-investments
During the course of 2022 we made three new equity investments: Intuit,
L'Oréal and Cognex. On the other side of the ledger we made four
dis-investments: Kimberly-Clark de México, Hiscox, Haleon and CH Robinson.
Intuit makes software for small businesses and consumers. It is an investment
idea that came to us through positive reports we heard from other companies,
who rate the management team highly. On investigation we too became enthused.
The company's core products are software for small business accounting and
consumer tax filing in the US. Profit growth in the years ahead could be
substantial as the company builds out its product range into areas such as
marketing, payroll, HR, and other adjacencies, giving small business owners a
one-stop shop for managing their affairs. It has a similar strategy to broaden
its consumer offering. We are backing the management team's vision, their
track record of execution, the attractive financial characteristics of the
business, and the company's commitment to paying a progressive dividend. The
share price fell precipitously in the first half of 2022 and we took this as a
cue to make an initial investment.
L'Oréal makes beauty products. We have long admired the company's
entrepreneurial culture and its commitment to seizing every new opportunity
for innovation. Time and again the management team have made good strategic
calls and executed on them, moving early into digital marketing and investing
in local R&D in China many years ago. The stable hand of the Bettencourt
family and a commitment to progressive dividend growth, together with an
exemplary balance sheet, also attract us. Again this was a growth company
that fell sharply in the first half of 2022, and we took this as an
opportunity to make an investment.
Cognex makes machine vision products. We are enthused by the company's growth
potential in the decade to come, as organisations around the world try to
automate repetitive, costly tasks such as checking labels in logistics, and
scanning for faults in manufacturing. Cognex is a pioneer in cameras and
software which can do this work at a fraction of the cost of humans, often
with higher accuracy. We see the potential for very strong demand in the years
ahead as its software gets ever-smarter and becomes capable of checking an
ever-wider assortment of items, in turn growing the company's customer base.
Growth does not require much capital and the company is committed to growing
its dividend alongside earnings. The management team and entrepreneurial
culture again appear excellent.
All three of these companies fit strongly with SAINTS' objective of long-term
compounding in earnings and dividends, combined with resilience along the way.
The dis-investments we made fell short of these criteria.
CH Robinson is a long-standing holding where the passage of time has raised
serious concerns about its future growth prospects. Its core business is
broking truck transportation in the US: matching shippers with truckers. Our
investment case had been predicated on strong customer and shipment growth as
its software platform went from strength-to-strength, displacing a long tail
of smaller competitors who would struggle to keep investing in the technology
needed to provide real-time tracking information, pricing and other services
to customers. What we did not foresee is that a wave of Silicon Valley
start-ups would enter the industry with cheap financing, writing business at
low prices to gain customers while worrying about profitability later. CH
Robinson lost market share, and an activist investor then gained seats on its
board, pushing a particular agenda. We visited the company in Minnesota last
November but failed to gain conviction that the management's strategy to
out-compete the disruptors would ultimately restore the company to good rates
of growth.
Kimberly-Clark de México is the leading manufacturer of nappies, tissues and
other sanitary products in Mexico. Our investment case was based on the
assumption that rising household incomes in Mexico would drive growth in
spending on the company's products, both in volume terms and through increased
pricing power. In practice, however, the company has struggled to grow its
earnings due to sustained pressure on its input costs, limited success in
gaining market share and the depreciation of the Mexican currency. With little
prospect that these headwinds will reverse and better opportunities elsewhere
in the portfolio, we dis-invested.
Haleon is a maker of over-the-counter medicines, and came to us through a
demerger from our holding in GSK. Our view is that the company, whilst not
without merits, owns a series of brands whose market position is not
particularly strong, and whose volume growth is unlikely to be particularly
inspiring.
Hiscox is a provider of insurance for businesses and households. It has been
a longstanding holding, but twice in the past 20 years it has stopped paying a
dividend when there has been a global shock: in 2001 and again in 2020. After
reviewing the company last year and considering our ongoing conversations with
management, we came to the conclusion that it did not meet the criteria SAINTS
sets in terms of dividend resilience, particularly in times of economic
crises. 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! We
will put that learning to work as we move forward.
It is, we have to say, a little surprising to us that during the course of
2022 we made only three new investments. We are not short of ideas. Growth
stocks have fallen out of favour, and we might have expected to acquire,
opportunistically, more stocks whose price/earnings multiples have been
de-rated. But many of the biggest fallers would not suit SAINTS, either
because they do not pay dividends or because their prospects are too
uncertain. In some other cases, where the fit for SAINTS is better, valuations
still don't look attractive enough for us to bite. We have tried to remain
disciplined in the face of market turmoil, and only bought new holdings where
we see an excellent fit, and long-term returns that we believe are firmly
skewed in shareholders' favour. Intuit, L'Oréal and Cognex all fall into
that category.
Refinancing of borrowings and non-equity investments
Most long-standing shareholders will be aware that SAINTS has for many years
endeavoured to enhance its income and returns through the use of prudent
long-dated borrowings. By taking advantage of the Company's permanent
capital base, structured as an investment trust, the Board is able to take on
modest levels of debt. The proceeds are then invested in a mixture of
non-equity assets, such as directly-held property and bonds, with yields above
the cost of borrowing. In many cases there is also the potential for real
capital growth, funded by these nominal borrowings. Typically these
investments constitute 10-15% of total assets, broadly matching the level of
gearing.
Until 2022, SAINTS borrowings chiefly took the form of a single debenture
which was arranged in the 1990s. Its coupon was fixed at 8%. This
debenture matured in April 2022, but before this transpired, and before
interest rates began their recent climb, the Board had propitiously arranged
replacement debt with a blended average coupon of around 3%.
Conscious of the value of diversification, the Board also took a decision at
its annual Strategy Day in 2020 which has since proven well-founded. The
Directors instructed the managers to review and recommend asset classes that
could diversify the Company's non-equity portfolio. Out of that discussion
came the agreement that, alongside the directly-held property and corporate
credit investments, which remain fundamental to the Company's approach, the
managers would also seek diversification by investing prudently in Emerging
Market sovereign bonds and Infrastructure-related equities. In both asset
classes, assuming careful stock selection, the risk of default should be low
and the prospective returns higher than the cost of borrowing. Additionally
the income from these two asset classes, perhaps even more so than property
and corporate bonds, are likely to prove uncorrelated with the Company's
income from equities, thereby improving the portfolio's resilience.
In 2022 this strategy proved its worth, as equity and property valuations came
under pressure from rising interest rates, as did the prices of corporate
bonds. Over the course of the year the Emerging Market sovereign bond and
infrastructure investments turned out to deliver the best-performance of any
asset class in SAINTS portfolio. Both delivered positive total returns.
The sovereign bonds followed a very different path from most of SAINTS'
holdings. Essentially this transpired because emerging market central banks
began hiking interest rates well before Europe and the US. This underpinned
strong emerging market currency appreciation during 2022, in countries such as
Brazil and Mexico, particularly against Sterling. SAINTS' income from these
investments grew healthily in Sterling terms, and capital values in Sterling
also increased.
The infrastructure investments also had a good year. These are typically
held in the form of equities, but their underlying cashflows are fundamentally
linked to infrastructure revenues. As managers we take care to ensure these
revenues are not economically sensitive, or at least are likely to remain
uncorrelated with the wider SAINTS portfolio. Examples include the wind farm
owner Greencoat UK Wind, the Italian national grid owner Terna, and the
Chinese tollroad owner Jiangsu Expressway. Across this portfolio of
infrastructure names, cashflows were generally very robust in 2022, share
prices were relatively stable, and dividends were either flat or growing.
Several of these investments, like the emerging market bonds, showed the
benefit of investing outside the UK as there was a further benefit boost to
income from Sterling depreciation.
The Company's long-standing directly held property portfolio faced a more
challenging environment. Underlying performance remained good, with the
portfolio fully-let, but rising interest rates adversely affected valuations.
The portfolio retains a strong focus on inflation-linked and increasing rents,
and this has rarely seemed more valuable: as a reminder, 57% of SAINTS' rental
income is linked to RPI or CPI, with a further 25% on fixed increases and 18%
on upward-only rent reviews. The portfolio also benefited from some
well-judged decisions by the manager, OLIM, to dis-invest from a number of
properties at valuations above book value. The portfolio's total return over
the course of 2022 was -1.7%, ahead of comparable property indices.
In the long-term, we expect the rate of compounding in earnings, dividends and
capital to be significantly stronger in the Company's equity portfolio than in
its non-equity portfolio. But there are solid returns available from our
non-equity holdings, alongside the benefits to income and capital from
diversification. With these investments now financed from borrowings at an
average cost of just below 3%, and bearing in mind that SAINTS debt is nominal
and will therefore be heavily eroded by inflation by the time the borrowings
are due to mature in the 2040s, we share the Board's view that this is an
attractive way for SAINTS to make use of the investment trust structure and
enhance returns for shareholders. The results in 2022 demonstrated these
benefits.
Investing sustainably
There is a debate raging at the moment. On one side are those who argue that
fund managers should stop messing about by pontificating on environmental,
societal and governance issues that may or may not surround their investments,
and instead focus on the core task they have been given by their shareholders:
to deliver investment returns. On the other side are those who argue that fund
managers have a duty as asset owners to ensure their investments are not
harming the environment or society, or failing to adhere to good standards of
governance, and indeed must be prepared to divest when those standards are not
met. The acronym 'ESG' is being tossed left and right, torn between those who
would promote it and those who would bin it.
As managers of SAINTS, we are very much of the same opinion as the Board on
this matter. Our duty is to pursue the long-term goals set out and agreed with
shareholders in the Company's investment policy. We are long-term investors,
seeking to deliver income and capital growth ahead of inflation over
multi-year periods. That long-term focus has been foundational to SAINTS'
success since it was established in 1873, and instrumental to the Company's
track record of keeping its dividend at least flat and most often growing in
every year since 1938.
If we were short-term managers, trading in and out of shares every few months,
perhaps we would hold our noses and invest in companies that are deeply
harmful to the environment, or society, or which exhibit gross failings of
governance. We could play the roulette wheel and gamble that, over such a
short holding period, the chances of getting caught out were low.
But we are not short-term speculators, we are long-term investors. And over
the investment period we pursue, with an average holding period of 8 years and
many of our investments held for over a decade, it is our responsibility to
give careful scrutiny to our holdings' environmental, societal and governance
opportunities and risks.
Some examples might be helpful to illustrate the point: investments whose ESG
failures would have damaged SAINTS' long-term NAV and dividend growth but
which, thankfully, we steered well clear of.
In the US, in the early 2000s, it was popular to proclaim a renaissance in
coal mining and to invest in companies such as Peabody and Arch Coal. But
America turned its back on sulphur and the numerous other air pollutants in
coal, pivoting to natural gas as soon as the opportunity presented itself with
the shale boom of the late 2000s. By 2011, numerous US coal companies had gone
bankrupt, with their shareholders suffering a permanent loss of capital.
Just as environmental harms skew the odds against sustainable long-term
profits and dividends, so the odds have often been stacked against companies
with deep social harms: such as tobacco companies, many of which have
struggled for years to deliver attractive growth in earnings and dividends. As
for governance, examples abound of companies that have transgressed and
subsequently failed. In just the past few months we have seen the implosion of
the cryptocurrency exchange FTX, where investigators have already alleged
gross failings of governance inside the company, precipitating bankruptcy and
the permanent impairment of shareholder value.
All of this informs our strong belief (in which we are very much aligned with
SAINTS' Board) that sustainability analysis is absolutely vital to meeting the
Company's investment objectives over the long-term. This is why, for every
SAINTS holding, your managers complete a thorough analysis of ESG
opportunities and risks. We monitor all of our holdings carefully, and
engage proactively on numerous topics to ensure the long-term compounding that
we seek on behalf of shareholders has every chance of being delivered. The
Board has also adopted and published a clear ESG policy for us to follow.
We have yet to find any company that is perfect. But we will not invest in any
company where we see significant harms that are not being addressed
ambitiously by the management, or where we do not trust them to deliver. And
we far prefer to invest in companies where there is strong alignment between
the company's products and operations and its wider stakeholders: such as
employees, society and the planet. For example, we have invested SAINTS'
capital in Albemarle, the leading lithium producer, for several years now. We
believe the market for green metals will continue to expand dramatically over
the decade ahead. We expect the environmental benefits that lithium enables
will lead to strong growth in capital and dividends.
We try hard to make sure that all of our holdings are perpetually improving.
SAINTS latest Annual Stewardship Report contains many examples of our
engagements with holdings over the course of the past year. To highlight a
couple briefly: we have encouraged Apple, Microsoft and other software
holdings to continue pushing towards best practice in cybersecurity, privacy,
and supply chain management. And we have voiced our desire for UPS to lean
into electrification and emissions reduction from its transport fleet.
This is all part-and-parcel of our responsibility as managers to ensure,
wherever possible, the likelihood of continued compounding in capital value
and dividends on behalf of SAINTS shareholders. As long-term investors, there
is no other sustainable path.
Outlook for 2023 and beyond
Few predictions cast at the end of 2019 foresaw the advent of COVID in early
2020. Few of those who forecast continued economic despair during the
ongoing lockdowns at the end of 2020 foresaw the enormous rally in equity
markets in 2021. And few who prognosticated at the end of 2021 predicted the
war in Ukraine at the start of 2022, with inflation reaching double-digits and
interest rates spiking higher. As we begin 2023, we remain humble about our
(or indeed anyone's) ability to foresee what is just around the corner.
What we can say with confidence is that SAINTS owns a portfolio of assets
which has proved itself resilient to some extreme tests over the past few
years. Earnings have grown steadily, as has the Company's NAV and, despite the
shock of a global pandemic which caused many income-generating investments to
stop or slash their distributions, the recommended final dividend will extend
SAINTS' track record of increases to 49 consecutive years. In 2022, the
Company's earnings and dividend broadly kept pace with inflation, despite
price indices surging higher.
Similarly, as we look to the future, we believe that your portfolio is well
placed to cope with whatever the coming year holds, be it inflation, recession
or recovery. This is because it is populated by a broadly diversified mix of
growth companies: including companies with strong brands that should enjoy
pricing power in an inflationary environment, such as Apple, and others that
are well placed to benefit from innovation and a growing competitive
advantage, such as Atlas Copco, and still others that are relatively recession
proof, such as Sonic Healthcare.
We made a number of new investments in 2022 which we believe upgraded the
resilience and growth potential of the Company. Whatever happens in the
world at large, we as managers will continue our search for steady long-term
compounding in earnings and dividends. We believe the portfolio is in good
shape, with strong underlying holdings. The cost of borrowing has fallen, and
the Company's non-equity investments have been diversified further for
enhanced returns and future resilience.
There are no certainties in investing. There can be no guarantee that SAINTS'
capital value and dividends will continue to compound higher in the decade to
come as they have in the decade past. But we do believe that, whatever winds
may blow, and as far as we are able to ensure as managers, the odds remain
skewed strongly in favour of long-term capital appreciation and dividend
growth in the years ahead for SAINTS shareholders.
James Dow
Toby Ross
Baillie Gifford & Co
9 February 2023
* NAV per share with borrowings at fair value
† CPI
Source: Baillie Gifford and Refinitiv
Income Statement
For the year ended For the year ended
31 December 2022 31 December 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments - securities - (80,091) (80,091) - 127,973 127,973
(Losses)/gains on investments - property - (5,114) (5,114) - 13,679 13,679
Currency gains/(losses) - 192 192 - (21) (21)
Income (note 2) 30,043 - 30,043 27,980 - 27,980
Management fees (980) (2,940) (3,920) (973) (2,920) (3,893)
Other administrative expenses (1,257) - (1,257) (1,252) - (1,252)
Net return before finance costs and taxation 27,806 (87,953) (60,147) 25,755 138,711 164,466
Finance costs of borrowings (921) (2,763) (3,684) (1,426) (4,278) (5,704)
Net return on ordinary activities before taxation 26,885 (90,716) (63,831) 24,329 134,433 158,762
Tax on ordinary activities (2,540) 790 (1,750) (2,509) 732 (1,777)
Net return on ordinary activities after taxation 24,345 (89,926) (65,581) 21,820 135,165 156,985
Net return per ordinary share (note 4) 13.82p (51.04p) (37.22p) 12.79p 79.20p 91.99p
The total column of the Income Statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are prepared under
guidance published by the Association of Investment Companies.
All revenue and capital items in these statements derive from continuing
operations.
A Statement of Comprehensive Income is not required as there is no other
comprehensive income.
The accompanying notes below are an integral part of the Financial Statements.
Balance Sheet
As at 31 December 2022 As at 31 December 2021
£'000 £'000 £'000 £'000
Non-current assets
Investments - securities 869,837 938,357
Investments - property 66,750 74,900
Deferred expenses - 207
936,587 1,013,464
Current assets
Debtors 3,213 3,710
Cash and cash equivalents 4,184 11,263
7,397 14,973
Creditors
Amounts falling due within one year (2,596) (83,327)
Net current assets/(liabilities) 4,801 (68,354)
Total assets less current liabilities 941,388 945,110
Creditors
Amounts falling due after more than one year (94,714) (14,925)
Net assets 846,674 930,185
Capital and reserves
Share capital 44,188 43,900
Share premium account 178,189 172,576
Capital redemption reserve 22,781 22,781
Capital reserve 583,814 673,740
Revenue reserve 17,702 17,188
Shareholders' funds 846,674 930,185
Net asset value per ordinary share* 479.0p 529.7p
Ordinary shares in issue (note 7) 176,750,943 175,600,943
* See Glossary of Terms and Alternative Performance Measures at the end
of this announcement.
The accompanying notes below are an integral part of the Financial Statements.
Statement of Changes in Equity
For the year ended 31 December 2022
Share Share Capital Capital Revenue Shareholders'
capital premium redemption reserve* reserve funds
£'000 account reserve £'000 £'000 £'000
£'000 £'000
Shareholders' funds at 1 January 2022 43,900 172,576 22,781 673,740 17,188 930,185
Shares issued 288 5,613 - - - 5,901
Net return on ordinary activities after taxation - - - (89,926) 24,345 (65,581)
Dividends paid in the year (note 5) - - - - (23,831) (23,831)
Shareholders' funds at 31 December 2022 44,188 178,189 22,781 583,814 17,702 846,674
For the year ended 31 December 2021
Share Share Capital Capital Revenue Shareholders'
capital premium redemption reserve* reserve funds
£'000 account reserve £'000 £'000 £'000
£'000 £'000
Shareholders' funds at 1 January 2021 40,649 112,751 22,781 538,575 16,406 731,162
Shares issued 3,251 59,825 - - - 63,076
Net return on ordinary activities after taxation - - - 135,165 21,820 156,985
Dividends paid in the year (note 5) - - - - (21,038) (21,038)
Shareholders' funds at 31 December 2021 43,900 172,576 22,781 673,740 17,188 930,185
* The capital reserve as at 31 December 2022 includes unrealised investment
holding gains of £280,732,000 (31 December 2021 - gains of £380,179,000)
The accompanying notes below are an integral part of the Financial Statements.
Cash Flow Statement
For the year ended For the year ended
31 December 2022 31 December 2021
£'000 £'000 £'000 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation (63,831) 158,762
Losses/(gains) on investments - securities 80,091 (127,973)
Losses/(gains) on investments - property 5,114 (13,679)
Currency gains/(losses) (192) 21
Finance costs of borrowings 3,684 5,704
Overseas withholding tax (1,761) (1,764)
Changes in debtors 507 (1,192)
Changes in creditors 382 (698)
Other non-cash changes 239 227
Cash from operations 24,233 19,408
Interest paid (4,784) (6,498)
Net cash inflow from operating activities 19,449 12,910
Cash flows from investing activities
Acquisitions of investments - securities (74,593) (167,997)
Disposals of investments - securities (8,239) (241)
Acquisitions of investments - property 62,783 86,271
Disposals of investments - property 11,275 13,679
Net cash outflow from investing activities (8,774) (68,288)
Cash flows from financing activities
Equity dividends (23,831) (21,038)
Shares issued 5,901 63,076
Loans notes drawn down 80,000 15,000
Debenture stock repaid (80,000) -
Costs of issuance of loan notes (16) (77)
Net cash (outflow)/inflow from financing activities (17,946) 56,961
(Decrease)/increase in cash and cash equivalents (7,271) 1,583
Exchange movements 192 (21)
Cash and cash equivalents at 1 January 11,263 9,701
Cash and cash equivalents at 31 December 4,184 11,263
The accompanying notes below are an integral part of the Financial Statements.
List of Investments as at 31 December 2022
Name Business Value £'000 % of
total assets
Global Equities
Novo Nordisk Pharmaceutical company 40,137 4.3
United Parcel Service Courier services 28,734 3.1
Procter & Gamble Household product manufacturer 28,431 3.0
Pepsico Snack and beverage company 25,908 2.8
Microsoft Computer software 25,182 2.7
Fastenal Distribution and sales of industrial supplies 24,739 2.6
Watsco Distributes air conditioning, heating and refrigeration equipment 22,763 2.4
Roche Pharmaceuticals and diagnostics 22,619 2.4
Taiwan Semiconductor Manufacturing Semiconductor manufacturer 21,884 2.3
Nestlé Food producer 20,423 2.2
Deutsche Boerse Securities exchange owner/operator 20,191 2.1
Coca Cola Beverage company 19,924 2.1
Sonic Healthcare Laboratory testing 19,409 2.1
Analog Devices Integrated circuits 19,216 2.0
Anta Sports Sportswear manufacturer and retailer 18,409 2.0
Apple Consumer technology 17,819 1.9
Schneider Electric Electrical power products 16,657 1.8
Experian Credit scoring and marketing services 16,287 1.7
McDonald's Fast food restaurants 15,574 1.7
Partners Group Asset management 15,373 1.6
Albemarle Producer of speciality and fine chemicals 15,110 1.6
Atlas Copco Engineering 15,062 1.6
Carsales.com Online marketplace for classified car advertisements 14,974 1.6
Edenred Voucher programme outsourcer 14,905 1.6
Wolters Kluwer Information services and solutions provider 14,742 1.6
Arthur J Gallagher Insurance broker 13,264 1.4
United Overseas Bank Commercial banking 13,168 1.4
Admiral Car insurance 12,642 1.3
B3 S.A. Securities exchange owner/operator 12,358 1.3
National Instruments Electronic test and measurement systems 12,263 1.3
Intuit Software 11,555 1.2
Cisco Systems Data networking equipment 10,795 1.2
Cullen/Frost Bankers Provides banking services throughout the state of Texas 10,444 1.1
Starbucks Coffee retailer 10,126 1.1
Hong Kong Exchanges and Clearing Securities exchange owner/operator 10,004 1.1
Man Wah Sofa designer and manufacturer 9,877 1.1
Rio Tinto Mining 9,626 1.0
Kering Luxury brand conglomerate 8,825 0.9
NetEase Online gaming company 8,787 0.9
L'Oréal Cosmetics 8,752 0.9
Kuehne + Nagel Worldwide freight forwarder 8,582 0.9
Midea Group Appliance manufacturer 8,388 0.9
Cognex Industrial automation 8,303 0.9
Medtronic Medical devices company 7,879 0.8
SAP Business software developer 7,438 0.8
Dolby Laboratories Multimedia software 7,063 0.8
T. Rowe Price Fund manager 7,029 0.7
USS Second-hand car auctioneer 7,014 0.7
Valmet Manufacturer of pulp and paper machinery 6,837 0.7
AVI Staple foods manufacturer 6,777 0.7
Silicon Motion Technology Semiconductor company 6,614 0.7
Want Want Snacks and milk-based products 6,454 0.7
TCI Producer of health-food products 5,917 0.6
Fevertree Drinks Producer of premium mixer drinks 5,666 0.6
Pernod Ricard Global spirits manufacturer 5,635 0.6
Línea Directa Aseguradora Car and home insurance provider 5,537 0.6
GlaxoSmithKline Pharmaceuticals, vaccines and consumer healthcare 5,210 0.6
Hargreaves Lansdown UK retail savings and investment platform 4,814 0.5
Amadeus IT Group Technology provider for the travel industry 4,103 0.4
Total Global Equities 802,218 85.2
Infrastructure Equities
Greencoat UK Wind UK wind farms 9,937 1.1
Terna Electricity grid operator 5,622 0.6
Jiangsu Expressway Tollroad operator 3,159 0.3
Assura Primary healthcare property group 2,783 0.3
BBGI Global Infrastructure PFI/PPP fund 2,678 0.3
Total Infrastructure Equities 24,179 2.6
Direct Property
Direct Property See table below. 66,750 7.1
Bonds
Sterling denominated Paymentsense 8% 2025 2,537 0.3
Euro denominated Ivory Coast 6.625% 2048 1,285 0.1
US dollar denominated Netflix 5.375% 2029 5,787 0.6
Catalent 5% 2027 3,180 0.3
Tesco 6.15% 2037 2,997 0.3
First Quantum Minerals 6.875% 2026 1,939 0.2
First Quantum Minerals 7.5% 2025 1,933 0.2
Brazil 7.125% 20/01/2037 1,892 0.2
Dominican Republic 5.875% 30/01/2060 1,653 0.2
Mexico 5.75% 12/10/2110 1,588 0.2
Mercadolibre 3.125% 2031 940 0.1
21,909 2.3
Brazilian real denominated Brazil CPI Linked 15/05/2045 4,896 0.5
Dominican peso denominated Dominican Republic 8.9% 15/02/23 1,877 0.2
Dominican Republic 9.75% 05/06/26 772 0.1
2,649 0.3
Indonesian rupiah denominated Indonesia 9% 15/03/2029 3,338 0.4
Indonesia 7.375% 15/05/2048 2,066 0.2
5,404 0.6
Mexican peso denominated Mexico IL 4% 15/11/2040 2,849 0.3
Peruvian sol denominated Peru 6.15% 12/08/2032 1,911 0.2
Total Bonds 43,440 4.6
Total Investments 936,587 99.5
Net Liquid Assets 4,801 0.5
Total Assets 941,388 100.0
(before deduction of borrowings)
Property Portfolio
Location Type Tenant 2022 2022 2021
Value % of Value
£'000 total assets £'000
Basingstoke* Warehouse G4S Cash Solutions (UK) Limited - - 3,000
Biggleswade Warehouse Sherwin-Williams UK Limited 6,500 0.7 7,650
Cleethorpes* Public House Stonegate Pub Company Limited - - 750
Crawley Petrol Station and Convenience Store Co-operative Group Holdings (2011) Ltd 3,300 0.4 3,800
Denbigh Supermarket Aldi Stores Limited 5,300 0.6 5,750
Earley Public House Spirit Pub Company (Managed) Limited 2,700 0.3 2,800
Holyhead(†) Hotel Premier Inn Hotels Limited 6,900 0.7 -
Kenilworth Nursing Home Care UK Community Partnerships Limited 5,000 0.5 6,200
Luton* Public House Stonegate Pub Company Limited - - 2,700
New Romney Holiday Village Park Resorts Limited 19,250 2.0 19,000
Newport Pagnell* Car Showroom Pendragon Plc - - 3,300
Otford Public House Spirit Pub Company (Managed) Limited 1,750 0.2 1,850
Pagham Convenience Store Co-operative Group Food Limited 1,150 0.1 1,350
Prestatyn Public House Stonegate Pub Company Limited 1,100 0.1 1,100
Southend-on-Sea Warehouse Booker Limited 9,400 1.0 11,200
Taunton Bowling Alley Mitchells & Butlers Retail (No.2) Limited 4,400 0.5 4,450
66,750 7.1 74,900
(†) Purchased during the year.
* Sold during the year.
Notes to the Financial Statements
1. Basis of Accounting
The Financial Statements for the year to 31 December 2022 have been prepared
in accordance with FRS 102 'The Financial Reporting Standard applicable in the
UK and Republic of Ireland' and on the basis of the accounting policies set
out in the Annual Report and Financial Statements for the year ended 31
December 2022.
2.
Income 2022 2021
£'000 £'000
Income from investments
UK dividends 3,285 4,499
UK interest 360 381
Overseas dividends 19,487 16,004
Overseas interest 2,356 2,175
25,488 23,059
Other income
Deposit interest 49 2
Rental income 4,475 4,905
Other income 31 14
4,555 4,921
Total income 30,043 27,980
Total income comprises
Dividends from financial assets classified at fair value through profit or 22,772 20,503
loss
Interest from financial assets designated at fair value through profit or loss 2,716 2,556
Interest from financial assets not at fair value through profit or loss 49 2
Other income not from financial assets 4,506 4,919
30,043 27,980
3. Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie
Gifford & Co, has been appointed as the Company's Alternative Investment
Fund Manager ('AIFM') and Company Secretary. Baillie Gifford & Co Limited
has delegated investment management services to Baillie Gifford & Co.
Dealing activity and transaction reporting have been further sub-delegated to
Baillie Gifford Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited.
The management of the property portfolio has been delegated to OLIM Property
Limited.
The Investment Management Agreement between the AIFM and the Company sets out
the matters over which the Managers have authority in accordance with the
policies and directions of, and subject to restrictions imposed by, the Board.
The Investment Management Agreement is terminable on not less than six months'
notice. Compensation fees would only be payable in respect of the notice
period if termination were to occur within a shorter notice period. The annual
management fee is 0.45% of the first £500 million of total assets and 0.35%
of the remaining total assets, total assets being the value of all assets held
(excluding the property portfolio) less all liabilities, other than any
liability in the form of debt intended for investment purposes, calculated on
a quarterly basis. The Board is of the view that calculating the fee with
reference to performance would be unlikely to exert a positive influence on
performance.
The Property Management Agreement sets out the matters over which OLIM
Property Limited has discretion and those matters which require Board
approval. The Property Management Agreement is terminable on three months'
notice. The annual fee is 0.5% of the value of the property portfolio, subject
to a minimum quarterly fee of £6,250.
4.
Net return per ordinary share 2022 2022 2022 2021 2021 2021
Revenue Capital Total Revenue Capital Total
Net return per ordinary share 13.82p (51.04p) (37.22p) 12.79p 79.20p 91.99p
Revenue return per ordinary share is based on the net revenue on ordinary
activities after taxation of £24,345,000 (2021 - £21,820,000) and on
176,207,530 (2021 - 170,652,354) ordinary shares of 25p, being the weighted
average number of ordinary shares in issue during the year.
Capital return per ordinary share is based on the net capital loss for the
financial year of £89,926,000 (2021 - net capital gain of £135,165,000), and
on 176,207,530 (2021 - 170,652,354) ordinary shares, being the weighted
average number of ordinary shares in issue during the year.
There are no dilutive or potentially dilutive shares in issue.
5.
Ordinary dividends 2022 2021 2022 2021
£'000 £'000
Amounts recognised as distributions in the year:
Previous year's final (paid 8 April 2022) 3.375p 3.00p 5,937 4,965
First interim (paid 22 June 2022) 3.25p 3.05p 5,730 5,204
Second interim (paid 20 September 2022) 3.40p 3.075p 5,994 5,308
Third interim (paid 16 December 2022) 3.50p 3.175p 6,170 5,561
13.525p 12.30p 23,831 21,038
We also set out below the total dividends paid and proposed in respect of the
financial year, which is the basis on which the requirements of section 1159
of the Corporation Tax Act 2010 are considered. The revenue available for
distribution out of current year profits by way of dividend for the year is
£24,345,000 (2021 - £21,820,000).
2022 2021 2022 2021
£'000 £'000
Dividends paid and payable in respect of the year:
First interim (paid 22 June 2022) 3.25p 3.05p 5,730 5,204
Second interim (paid 20 September 2022) 3.40p 3.075p 5,994 5,308
Third interim (paid 16 December 2022) 3.50p 3.175p 6,170 5,561
Current year's proposed final dividend (payable 13 April 2023) 3.67p 3.375p 6,487 5,937
13.82p 12.675p 24,381 22,010
6. During the year, the 8% Debenture Stock 2022 ('Debenture Stock') was
redeemed at par value on 10 April 2022 and the Company refinanced by issuing
£80 million of long-term secured privately placed notes ('loan notes') in two
tranches of £40 million both with a fixed coupon of 3.12% and repayment dates
of 11 April 2045 and 11 April 2049. In 2021 the Company issued £15 million of
loan notes with a fixed coupon of 2.23% and a repayment date of 25 June 2036.
At 31 December 2022 the total book value of the loan notes was £94,714,000
(31 December 2021 - £14,925,000) and the total market value was £65,549,000
(31 December 2021 - £14,922,000). At 31 December 2021 the book value of the
Debenture stock was £80,236,000 and the market value was £82,500,000.
7. During the year, 1,150,000 (2021 - 13,005,000) shares were issued at a
premium to net asset value raising proceeds of £5,901,000 (2021 -
£63,076,000). At 31 December 2022 the Company had authority to buy back
26,367,551 ordinary shares and to allot 16,740,094 ordinary shares without
application of pre-emption rights in accordance with the authorities granted
at the AGM in April 2022. No shares were bought back during the year.
8. During the year, transaction costs on purchases amounted to £551,000
(2021- £113,000) and £174,000 (2021 - £290,000) respectively. Of the gains
on sales during the year of £14,242,000 (2021 - gains of £37,906,000) a net
gain of £12,258,000 (2021 - net gain of £14,491,000) was included in
investment holding gains at the previous year end.
9.
Analysis of change in net debt 1 January Cash Exchange movement Cost of issuance* Other non-cash changes 31 December
2022
flows
£'000
2022
£'000 £'000
£'000 £'000 £'000
Cash and cash equivalents 11,263 (7,271) 192 - - 4,184
Debenture Stock due in less than one year (80,236) 80,000 - - 236 -
Loan notes due in more than one year (14,925) (80,000) - 223 (12) (94,714)
Total (83,898) (7,271) 192 223 224 (90,530)
*Cost of issuance includes carried forward deferred expenses of £207,000.
10. The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2022 or 2021 but is derived
from those accounts. Statutory accounts for 2021 have been delivered to the
registrar of companies, and those for 2022 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
11. The Report and Accounts will be available on the SAINTS page of the
Managers' website saints-it.com (http://www.saints-it.com) (‡) on or around
3 March 2023.
Glossary of Terms and Alternative Performance Measures ('APM')
Total Assets
Total assets less current liabilities, before deduction of all borrowings.
Net Asset Value
Net Asset Value (NAV) is the value of total assets less liabilities (including
borrowings). The NAV per share is calculated by dividing this amount by the
number of ordinary shares in issue.
Net Asset Value (Borrowings at Book Value)
Borrowings are valued at adjusted net issue proceeds. Book value approximates
amortised cost.
Net Asset Value (Borrowings at Fair Value) (APM)
Borrowings are valued at an estimate of their market worth. This indicates the
cost to the Company of repaying its borrowings under current market
conditions. It is a widely reported measure across the investment trust
industry.
31 December 2022 31 December 2021
Shareholders' funds (borrowings at book value) £846,674,000 £930,185,000
Add: book value of borrowings £94,714,000 £95,161,000
Less: fair value of borrowings (£65,549,000) (£97,422,000)
Shareholders' funds (borrowings at fair value) £875,839,000 £927,924,000
Shares in issue at year end 176,750,943 175,600,943
Net Asset Value per ordinary share (borrowings at fair value) 495.5p 528.4p
Premium/(Discount) (APM)
As stockmarkets and share prices vary, an investment trust's share price is
rarely the same as its NAV. When the share price is lower than the NAV per
share it is said to be trading at a discount. The size of the discount is
calculated by subtracting the share price from the NAV per share and is
usually expressed as a percentage of the NAV per share. If the share price is
higher than the NAV per share, this situation is called a premium.
2022 2022 2021 2021
NAV NAV NAV NAV
(book) (fair) (book) (fair)
Closing NAV per share 479.0p 495.5p 529.7p 528.4p
Closing share price 508.0p 508.0p 541.0p 541.0p
Premium 6.1% 2.5% 2.1% 2.4%
Ongoing Charges (APM)
The total expenses (excluding borrowing costs) incurred by the Company as a
percentage of the average net asset value (with borrowings at fair value). The
ongoing charges have been calculated on the basis prescribed by the
Association of Investment Companies.
A reconciliation from the expenses detailed in the Income Statement above is
provided below.
31 December 2022 31 December 2021
Investment management fee £3,920,000 £3,893,000
Other administrative expenses £1,257,000 £1,252,000
Total expenses (a) £5,177,000 £5,145,000
Average daily cum-income net asset value (with borrowings at fair value) (b) £877,093,000 £826,357,000
Ongoing charges (a) ÷ (b) (expressed as a percentage) 0.59% 0.62%
Total Return (APM)
The total return is the return to shareholders after reinvesting the net
dividend on the date that the share price goes ex-dividend.
2022 2022 2022 2021 2021 2021
NAV NAV Share NAV NAV Share
(book) (fair) price (book) (fair) price
Opening NAV per share/share price (a) 529.7p 528.4p 541.0p 449.7p 446.1p 464.0p
Closing NAV per share/share price (b) 479.0p 495.5p 508.0p 529.7p 528.4p 541.0p
Dividend adjustment factor* (c) 1.027330 1.026941 1.027687 1.025486 1.025738 1.024954
Adjusted closing NAV per share/share price (d = b x c) 492.1p 508.8p 522.1p 543.2p 542.0p 554.5p
Total return (d ÷ a)-1 (7.1%) (3.7%) (3.5%) 20.8% 21.5% 19.5%
* The dividend adjustment factor is calculated on the assumption that the
dividends paid out by the Company are reinvested into the shares of the
Company at the cum income NAV/share price at the ex-dividend date.
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an
investment trust can borrow money to invest in additional investments for its
portfolio. The effect of the borrowing on the shareholders' assets is called
'gearing'. If the Company's assets grow, the shareholders' assets grow
proportionately more because the debt remains the same. But if the value of
the Company's assets falls, the situation is reversed. Gearing can therefore
enhance performance in rising markets but can adversely impact performance in
falling markets.
Potential gearing is the Company's borrowings expressed as a percentage of
shareholders' funds.
31 December 2022 31 December 2021
Borrowings at book value £94,714,000 £95,161,000
Shareholders' funds £846,674,000 £930,185,000
Potential gearing 11% 10%
Equity gearing is the Company's borrowings adjusted for cash, bonds and
property expressed as a percentage of shareholders' funds.
31 December 2022 31 December 2021
Borrowings at book value £94,714,000 £95,161,000
Less: cash and cash equivalents (£4,184,000) (£11,263,000)
Less: bond investments (£43,440,000) (£48,950,000)
Less: direct property investments (£66,750,000) (£74,900,000)
Adjusted borrowings (£19,660,000) (£39,952,000)
Shareholders' funds £846,674,000 £930,185,000
Equity gearing (2%) (4%)
Leverage (APM)
For the purposes of the Alternative Investment Fund Managers (AIFM)
Regulations, leverage is any method which increases the Company's exposure,
including the borrowing of cash and the use of derivatives. It is expressed as
a ratio between the Company's exposure and its net asset value and can be
calculated on a gross and a commitment method. Under the gross method,
exposure represents the sum of the Company's positions after the deduction of
sterling cash balances, without taking into account any hedging and netting
arrangements. Under the commitment method, exposure is calculated without the
deduction of sterling cash balances and after certain hedging and netting
positions are offset against each other.
Active Share (APM)
Active share, a measure of how actively a portfolio is managed, is the
percentage of the listed equity portfolio that differs from its comparative
index. It is calculated by deducting from 100 the percentage of the portfolio
that overlaps with the comparative index. An active share of 100 indicates no
overlap with the index and an active share of zero indicates a portfolio that
tracks the index.
Sustainable Finance Disclosure Regulation ('SFDR')
The EU Sustainable Finance Disclosure Regulation ('SFDR') does not have a
direct impact in the UK due to Brexit, however, it applies to third-country
products marketed in the EU. As The Scottish American Investment Company
P.L.C. is marketed in the EU by the AIFM, BG & Co, via the National
Private Placement Regime 'NPPR' the following disclosures have been provided
to comply with the high-level requirements of SFDR.
The AIFM has adopted Baillie Gifford & Co's Governance and Sustainable
Principles and Guidelines as its policy on integration of sustainability risks
in investment decisions.
Baillie Gifford & Co's approach to investment is based on identifying and
holding high quality growth businesses that enjoy sustainable competitive
advantages in their marketplace. To do this it looks beyond current financial
performance, undertaking proprietary research to build an in-depth knowledge
of an individual company and a view on its long-term prospects.
This includes the consideration of sustainability factors (environmental,
social and/or governance matters) which it believes will positively or
negatively influence the financial returns of an investment.
More detail on the Managers' approach to sustainability can be found in the
Governance and Sustainability Principles and Guidelines document, available
publicly on the Baillie Gifford website (bailliegifford.com).
Taxonomy Regulation
The Taxonomy Regulation establishes an EU-wide framework of criteria for
environmentally sustainable economic activities in respect of six
environmental objectives. It builds on the disclosure requirements under SFDR
by introducing additional disclosure obligations in respect of alternative
investment funds that invest in an economic activity that contributes to an
environmental objective.
The Company does not commit to make sustainable investments as defined under
SFDR. As such, the underlying investments do not take into account the EU
criteria for environmentally sustainable economic activities
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implied, as to the accuracy, completeness or timeliness of the data contained
herewith nor as to the results to be obtained by recipients of the data. No
Provider shall in any way be liable to any recipient of the data for any
inaccuracies, errors or omissions in the index data included in this document,
regardless of cause, or for any damages (whether direct or indirect) resulting
therefrom.
No Provider has any obligation to update, modify or amend the data or to
otherwise notify a recipient thereof in the event that any matter stated
herein changes or subsequently becomes inaccurate.
Without limiting the foregoing, no Provider shall have any liability
whatsoever to you, whether in contract (including under an indemnity), in tort
(including negligence), under a warranty, under statute or otherwise, in
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conclusions, or any course of action determined, by you or any third party,
whether or not based on the content, information or materials contained herein
FTSE Index Data
London Stock Exchange Group plc and its group undertakings (collectively, the
'LSE Group'). © LSE Group 2023. FTSE Russell is a trading name of certain of
the LSE Group companies. 'FTSE®' 'Russell®', 'FTSE Russell®', is/are a
trade mark(s) of the relevant LSE Group companies and is/are used by any other
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Neither LSE Group nor its licensors accept any liability for any errors or
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Automatic Exchange of Information
In order to fulfil its legal obligations under UK tax legislation relating to
the automatic exchange of information, The Scottish American Investment
Company P.L.C. is required to collect and report certain information about
certain shareholders.
The legislation requires investment trust companies to provide personal
information to HMRC on certain investors who purchase shares in investment
trusts. Accordingly, The Scottish American Investment Company P.L.C. will have
to provide information annually to the local tax authority on the tax
residencies of a number of non-UK based certificated shareholders and
corporate entities.
Shareholders, excluding those whose shares are held in CREST, who come on to
the share register will be sent a certification form for the purposes of
collecting this information.
For further information, please see HMRC's Quick Guide: Automatic Exchange of
Information - information for account holders
gov.uk/government/publications/exchange-of-information-account-holders.
‡ Neither the contents of the Managers' website nor the contents of any
website accessible from hyperlinks on the Managers' website (or any other
website) is incorporated into, or forms part of, this announcement.
None of the views expressed in this document should be construed as advice to
buy or sell a particular investment.
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