Scottish American: shelter in diversity

That's where Scottish American Investment Company comes in. It aims to be a core investment for private investors seeking income. The fund's dividend has increased 67 per cent between 2003 and 2011, according to Winterflood figures - some way ahead of inflation as measured by the Retail Prices Index (RPI). Its mandate is above-inflation dividend growth.

Despite the name, it's not a US focused fund; it's in the global growth & income sector and is exposed to asset classes such as bonds and property as well as equity. That helps negate the cost of the fund's long-term debenture, which was issued in three tranches in the 1990s and matures 10 years from now.

Performance is benchmarked against the FTSE World index, but the investment portfolio is managed actively with little regard for the index. Around 80 per cent of the equity portfolio is at a weight other than its index weight, or in stocks that lie outside the index; the managers, Patrick Edwardson and Dominic Neary, believe this is the best way to drive growth for shareholders. The investment process is very much bottom-up, with the managers maintaining that you can still find good companies even in the worst economic environments.

Stock selection is concentrated on companies that have the potential to grow their dividends. But, despite the requirement to generate an above-average yield, the management team remains focused on total returns and around 40 per cent of the portfolio has a yield below 3 per cent. Overall, the fund boasts a yield of 4.5 per cent.

The fund's dividend was slightly uncovered in its last financial year, but analysts expect it to be covered in the current financial year given the fund managers' expectations of mid to single-digit dividend growth from the equity portfolio.

Mr Neary describes the fund as "an equity vehicle that happens to have additional investments that are enabled by the debenture", adding that the fund is often incorrectly dubbed multi-asset.

The equity holdings are well diversified geographically, with UK exposure accounting for around 33 per cent. The managers like the dividend culture of companies here and the fact that many benefit from global exposure.

The second largest exposure in the equity portfolio (representing around 25 per cent by value) is to emerging markets. "We are long-term believers in emerging markets and the domestic growth story as opposed to the export story," says Mr Neary, adding that these markets have reached a stage where they are enjoying self-sustained growth.

Despite a strong weighting in emerging markets the size of the holdings are much smaller than the developed market holdings, further aiding diversification.

The fund is currently trading on a discount of 1 per cent which is broadly in line with its average discount of 1.9 per cent, although the fund has traded on a premium of around 4 per cent at times.

The key attractions of this fund lie in its broad diversification, attractive dividend growth and the fact that its managers are willing to consider more esoteric investments in searching for diversified sources of income. In a world where income and growth will be increasingly hard to find, this is welcome. Buy.

Source: Thomson Reuters Datastream, Winterflood

Performance figures as at 6 June 2012.

Top 10 holdings (as at 30 April 2012)

Geographic breakdown