SAINTS: Why We're Underweight US Stocks

Scottish American Investment Trust is underweight US stocks compared to peers, preferring to diversify across Europe and Asia

Emma Wall 21 April, 2017 | 2:05PM


Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Toby Ross, Manager of the Scottish American Investment Trust.

Hello, Toby.

Toby Ross: Hi, Emma.

Wall: Otherwise known of SAINTS, which I would hope means you're not a sinner as an investor, Scottish American, a bit of a confusing name because you've actually been underweight America and you've only got one stock in Scotland.

Ross: That's right. The name Scottish American actually dates back to 1873 because the origins of the Trust that we're investing in what was then the big growth asset which was American Railroad bonds in the 1870s. Today, we are mostly an equity trust. So, basically, 100% of Trust's NAV today is in equities and then we also have some bonds and property which are financed by debt.

Those equities are actually from all around the world. So, we aim to have a portfolio that is very diversified by sources of growth, by sources of income, by geography, by currency. And we don't tend to allocate money between markets on a sort of top-down basis. We don't think about, right, we're particularly bullish on Australia, let's have 10% of the portfolio in Australia. Those asset allocations are really the result of individual bottom-up stock decisions there, where are we finding the best combinations of long-term growth and attractive dividends.

And today, we've got about 30% of the portfolio in American businesses. And yeah, with that, there's a huge variety of opportunities, but we don't start our thinking about asset allocation with the benchmark-weighting which today would be 55% and say, right, well, our starting point has got to be mimic that. We build it out from individual companies that we're enthusiastic about.

And if you looked within our U.S. weighting, the businesses within that would be very different from the index. We don't own any American oil companies, for instance. But we do own a number of interesting industrial businesses like Fastenal, the distributor, where we think there's a great management team and a big growth opportunity.

Wall: And a lot of your peers, as you've alluded to, have been very overweight U.S. Some of them have 50%, 60% of a global fund in one country, which I suppose is not necessarily offering the diversification one thinks when one is buying in a global fund. I know that you're also a little cautious on the U.K. market as well, particularly because of the sort of sector – or lack of sector diversification that people get in the FTSE 100?

Ross: That's right. So, again, when we're thinking about our allocation versus any individual market, it really is driven by individual opportunities. But what we would be very uncomfortable doing is relying on – if you bought the FTSE All-Share Index today, over half of the income would come from 10 businesses. We're trying to deliver a diversified growing income stream to our investors over the long run and we think that degree of concentration would be crazy to take. And we cap the contribution of any one stock at about 5% of the portfolio.

Today, we have about 20% of the portfolio in U.K. names. So, we can find some opportunities which provide both significant growth opportunities and an attractive, sort of, dividend – management teams that really believe in the value of dividends. So, we can find several opportunities there today. But again, those don't tend to be biased towards the domestic U.K. economy and the makeup of our U.K. holdings looks very different from that of the index, because again, we're bottom-up stock pickers. We don't start with the index and then work back.

Wall: Some of the key players in the sort of U.K. dividend space over the last 10 years have been the big high-street banks, which obviously have – some have cut their dividends highly, some just trimmed their dividends and some are yet to come back to the dividend market. I know financial stocks is an area that you do have a large allocation, but you were telling me earlier that doesn't necessarily look like one might expect. It's less about high-street banks and more about niche players, isn't it?

Ross: That's exactly right. And actually – so, within the fund about 20% of the portfolio today is in financials businesses of various kinds. But what you'd see if you looked within that is that where we own banks, they tend to be very focused niche banks often actually with a family or a foundation sort of sitting behind it controlling what goes on. So, they are not Citigroup or JPMorgan. They are businesses where the founding families still have a 20% stake such as United Overseas Bank in Singapore.

Wall: So, interests are aligned?

Ross: Yeah, exactly. And we think that's really important in financials businesses. Also, when you've got a family at the helm or the founding management team, as you do in some of our insurance businesses, they are very happy to take the long view of growth, they are very happy to grow steadily over a very long period whilst also generating cash for dividends. And it's that combination of steady growth, sort of, steady compounding away at a big long-run growth opportunity and generating cash for dividends at the same time that we find appealing.

Where financials businesses have often gone wrong in the past is in a competitive market they try and grow too fast or they try and diversify into too many things and we think actually an aligned management team is your best defense against that.

Wall: Toby, thank you very much.

Ross: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Scottish American Ord355.50 GBX0.14
About Author Emma Wall

Emma Wall  is Senior Editor for