Scottish American (SCAM) has reduced exposure to UK property that will be affected by a fall in consumer spending.
The £476 million investment trust is unusual among its global equity income rivals in holding property and bonds as well as shares in companies around the world.
The 144-year-old stock market listed fund has a £80 million long-term loan, or debenture, which it mostly invests in a high yielding property portfolio run by OLIM Property, a real estate manager founded by Matthew Oakeshott, the former Liberal Democrat peer.
Annual results last week showed that after charges Scottish American achieved an overall 18.8% total return from its diverse pool of assets, beating its global equity benchmark which returned 13.8%, althogh the actual return received by shareholders was 17.2%
The property portfolio generated the smallest total return: 13.7% compared to the 15.5% from the fund’s main investments in solid, dividend paying international companies such as Coca-Cola and Prudential, the British financial services group.
Bonds account for less than 7% of Scottish American but yielded an impressive 30.1% return as fixed interest stocks enjoyed a potentially final flourish as rising interest rates look to end their 30-year bull run.
OLIM made several property disposals during the year in what Moon called its ‘carefully planned progress in reducing exposure to any falls in UK consumer spending.’
These included two restaurants leased to Italian chain Prezzo, a car show room occupied by Pendragon and a Fuller Smith & Turner pub in Winchester. These reduced Scottish American’s property weighing to 14.6% by the year-end.
The property portfolio punched above its weight in terms of generating income for the fund, which is the only trust of seven managed by Baillie Gifford that has a dividend focus.
Rental income rose to £5.16 million from £4.1 million in 2016, accounting for around a quarter of the trust’s total investment income of £20.48 million, which increased from £18.63 million.
While Scottish American, which has been run by James Dow and Toby Ross since the departure last summer of its long-standing manager Dominic Neary, benefited from accelerating global economic growth, it sounded a cautious note on its own dividend.
Moon said there was geopolitical risk in the form of Korea but the two principal worries that have ‘continued to bubble away in the background’ are further interest rate rises and ‘whether 10 years of quantitative easing [money printing by central banks] has stretched valuations to the point where a correction is likely to occur’.
With the UK and global markets reeling from a series of sharp sell-offs in the past two weeks, the board decided to declare a modest rise in its dividend to shareholders.
With earnings per share for last year rising 8% to 11.33p, the company is paying 11.1p in dividends, 2.5% more than last year. While this is the 38th year it has grown the dividend, it is less than the current 3% rate of inflation as the board decided to use the remainder to top up revenue reserves which it can use to boost future payouts.
‘It is important that the company’s future income prospects depend principally on the cashflows of our equity investments and the strength of property covenants and length of leases... rather than on the level of markets,’ he said.
Moon added that UK consumer spending was already put under pressure last year but ‘whether inflation persists at its current level is less clear’. The uncertainty is driven by weakness in the UK economy combined with ‘action by the Bank of England on the one hand and a strengthening oil price on the other’.
Global growth is likely to remain strong this year but the outlook for the UK economy was ‘less positive’, he said.
‘In addition, the concerns relating to valuations and rising interest rates make share price progress less than certain, as has been demonstrated recently,’ he said.
Scottish American yields 3.2% and has generated a total shareholder return of 77.5% over five years, ahead of the 57.8% average from the seven trusts in the AIC Global Equity Income sector. At 350p today the shares stand at a small 1.7% premium above their underlying net asset value.