SAINTS spotlight: steady amid euphoria

As with any investment, your or your clients’ capital is at risk. Any income is not guaranteed and can fall as well as rise.

We expect income from SAINTS’ equity portfolio to be approximately 5 per cent higher this year than last, subject to audit. This growth rate beats UK inflation – and that of most other markets’ – extending our track record. It’s a testament to the solid fundamentals of our holdings.  

The portfolio return during the year – ie capital growth as well as income distribution – was strong, but a negative share price return lagged exceptionally strong global equity markets. This is uncomfortable but, in some ways, to be expected. SAINTS’ emphasis on long-term resilience, alongside steady compound growth in earnings and dividends, means portfolio returns are likely to lag during periods of market euphoria. The flip side is that we expect returns to hold up better when markets are tougher.

Market backdrop

President Trump’s victory led investors to revise US growth expectations upwards for 2025 and triggered large inflows from retail clients into US equities.

The markets perceive his administration as pro-business and pro-cyclical thanks to promises to cut regulation, lower taxes and provide cheaper energy. Never mind Trumponomics’ apparent contradictions: boosting growth, raising tariffs and taming inflation while driving down the dollar. Or the potential for a counter-narrative in which higher interest rates slow the US economy while its partners retaliate on trade.

Elsewhere, China, the world’s growth engine for the past two decades, may be suffering from ‘Japanification’, with the real estate bubble bursting, leading to what economists call a balance sheet recession. However, its government has room to stimulate activity and seems increasingly likely to do so.

In Europe, economic growth remains anaemic, and the threat of US tariffs and their collateral damage – China exporting more to Europe as the US market closes – have politicians scrambling to devise a response.

Performance of the equity portfolio

In the last quarter of the year, the equity portfolio showed slightly negative returns and lagged global equity markets’ exceptional returns (our benchmark, the FTSE All World Index, rose about 6 per cent).

For the equity portfolio, the largest contributor to performance was Taiwanese chipmaker TSMC, the main supplier of NVIDIA’s chips. Its Q3 results showed a 54 per cent increase in earnings per share versus the previous year, with little sign of demand weakening for AI chips.

The second largest contributor was the derivatives marketplace company CME Group (Chicago Mercantile Exchange), which we introduced in SAINTS Spotlight’s last edition. Its shares rallied after it announced a higher special dividend and reported strong underlying results. Networking equipment giant Cisco also boosted performance as investors turned more positive on the potential for AI to raise Cisco’s growth prospects.

On the other side of the ledger, not holding a few technology companies continues to weigh on relative performance, with two of the top five detractors being Tesla and NVIDIA.

Of stocks held, Danish pharmaceutical company Novo Nordisk announced disappointing results from a next-generation obesity drug trial at the end of December, leading to a sharp decline in its share price. While this is a setback, it still shows some promising results and keeps Novo Nordisk at the front of the race against obesity, alongside the US’s Eli Lilly. Even after the decline in its share price, Novo Nordisk remains the top contributor to performance over the past five years.

Swedish industrial company Atlas Copco also weighed on performance after it reported a slowdown in orders and issued cautious guidance for the months ahead.

Other asset classes

The total impact on performance from the other asset classes was muted (about -0.4 per cent). Positive returns in the property portfolio, primarily from the income contribution, were offset by the negative returns of bonds and listed infrastructure equities as interest rates increased over the period, negatively affecting both asset classes.

Transactions

We added one stock this quarter: US-listed Paychex. It is one of the largest HR solutions providers for small and medium-sized businesses in the US, with a small presence in Europe.

For a low fee, its software helps business owners manage payrolls, medical insurance and pension contributions, among other matters. Paychex has a diversified set of about 745,000 clients, a deep knowledge of regulations, a powerful distribution network and strong customer support. All are difficult for others to replicate.

The firm’s recent share price weakness, driven by concerns about competition from native cloud companies and worries about a US economic slowdown, provided an attractive entry point. Our analysis suggests that the economic slowdown is likely already priced in. Following a report by our investigative analyst, we are less concerned about competition.

To fund the Paychex purchase, we divested from Australian-listed Sonic Healthcare, a position held since 2014. We had based our investment thesis on the growing volume of lab tests due to an ageing population and the government’s trend to outsource testing. Despite the pandemic-induced boost to earnings, Sonic is one of our few holdings whose earnings growth disappointed over the past five and 10 years. Further analysis led us to conclude that while test volumes were indeed growing, relentless pressure on fees and cost inflation were likely to continue weighing on earnings and dividend growth.

About 42 per cent of SAINTS’ portfolio is invested in US equities by place of listing. This is much more than we have invested in any other country but it’s clearly some way below the 66 per cent weighting in the benchmark. There are four main reasons for this gap:

1. We seek companies with strong earnings and dividend growth prospects, regardless of where they are listed. Our universe includes approximately 6,000 companies globally, of which around 2,000 are US-listed. All else being equal, we therefore expect about one-third of the portfolio to be listed in the US. It would take a leap of faith to believe that 68 per cent of the world’s best compounders are listed there


2. US valuations, which were only slightly higher than the rest of the world for many years, have diverged dramatically over the past several years. This has made the US less attractive as a source of income and future capital returns. Often, we see two good companies listed in Europe and the US, both with a similar mix of business globally, but the US stock trade offers half the dividend yield and twice the price-to-earnings (P/E) multiple (the company’s share price relative to its earnings per share). We naturally favour the European name, all else being equal

3. US equities tend to use buybacks above dividends to return cash to shareholders. While in theory equal, in practice they are anything but. Buybacks tend to be pro-cyclical – increasing the risk of a company buying back shares on high valuations – and are a lot easier to switch off when times are tough, whereas dividends are far more resilient
 

4. We value diversification, which improves resilience. Anchoring 68 per cent of the portfolio’s income to a single currency, the US dollar, would introduce a large risk for our income investors

These are the reasons behind our underweight positioning in US equities by place of listing. We note this is very different from our exposure to the US economy.

How can that be? Well, for example, Nestle is listed in Switzerland, but generates only ~1 per cent of its revenues in that country.

Most of European holdings generate significant revenues from the US. Indeed, we know that ~41 per cent of the portfolio’s revenues are generated in the US, only slightly lower than the MSCI ACWI’s 46 per cent.

So, we have no intention of chasing the benchmark and closing the gap. We want to maintain diversification, which is critical to ensure resilience over the long term. We reject the diktat of the index and think it would be imprudent to allocate two-thirds of our clients’ capital to a single market. We note that retail investors’ optimism for US equities has not been this high since 2009, and this can easily and swiftly reverse. Furthermore, current valuations look quite unattractive. On a forward-looking price-earnings multiple, the gap between US equities and the rest of the world is at its highest in 20 years. There is much to like about US companies, but we owe it to clients to be mindful of these risks.

Looking forward

As we look forward to the next five years, we have several reasons to feel confident.

Dividend growth over the past five years has been and remains strong. All our analysis points to this continuing. Not only should this provide good income growth but also good capital growth, because steady growth in cash earnings is the only sustainable way to grow dividends over the long term, and share prices follow earnings in the long term.

A well-diversified selection of long-term compounders means future performance should not be hostage to a particular theme, sector or country. Quality growth and resilience remain SAINTS’ key features. The high return on equity allows companies to pay growing dividends and reinvest for growth, while the low level of debt provides resilience.

The valuation multiple attached to our portfolio companies’ stream of resilient cash flows remains at a modest premium to the FTSE All-World index. However, the index average masks a wide dispersion: the valuation gap between US equities and the rest of the world is at a 20-year high. While the gap could extend further, the combination of relatively high valuation and unbridled enthusiasm for US equities leaves little room for disappointment. We believe the fund’s valuation is, therefore, considerably more attractive.

In the long run, two factors are crucial for delivering attractive investment returns: companies’ fundamental progress in terms of return on capital and earnings growth, and the valuation attached to this anticipated growth. On both the prospects for growth and on valuation, we feel confident about our portfolio.

Over the next five years, geopolitical tensions, indebted governments unable to smooth over economic bumps and a maturing economic cycle will test the markets. Our holdings’ quality and resilience provide a robust foundation and should help you sleep well at night.

Past performance is not a guide to future returns.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2025. 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 LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.”

The value of the trust's shares and any income from them can fall as well as rise. Past performance is not a guide to future returns.

This communication was produced and approved in February 2025 and has not been updated subsequently. It represents views held at the time of recording and may not reflect current thinking.

This communication should not be considered as advice or a recommendation to buy, sell or hold a particular investment. This communication contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised or regulated by the Financial Conduct Authority. The value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested.

Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA).

The specific risks associated with the Trust include:

• 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.
• The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.
• Market values for securities which have become difficult to trade may not be readily available and there can be no assurance that any value assigned to such securities will accurately reflect the price the Trust might receive upon their sale.
• The Trust can make use of derivatives which may impact on its performance.
• Share prices may either be below (at a discount) or above (at a premium) the net asset value (NAV). The Company may issue new shares when the price is at a premium which may reduce the share price. Shares bought at a premium may have a greater risk of loss than those bought at a discount.

Further details of the risks associated with investing in the Trust, including a Key Information Document and how charges are applied, can be found in the Trust specific pages at www.bailliegifford.com, or by calling Baillie Gifford on 0800 917 2113.

139714 10052912