F&C trust braced for market fall

F&C Investments’ Jeremy Tigue has braced his £2.7bn investment trust for a fall in markets and removed some of the borrowing that contributed to its recent strong performance.

The manager of the Foreign & Colonial Investment Trust said he would reduce the trust’s level of gearing, a form of borrowing which amplifies investment gains and losses, because stocks had rallied hard in the past year.

“We are definitely more cautious than we were a year ago and in September 2011,” he said.

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“Then, the eurozone was going down the tube and US debt had been downgraded, which was a huge deal in the states,” the manager said.

“We thought that was ridiculous. Companies were still making a profit so we were pretty bullish and increased gearing.”

The board allows the trust to raise gearing to a maximum of 20 per cent and the manager reached 18.8 per cent in 2011.

Now gearing, which is measured in size relative to the trust’s assets, is at 12 per cent and Mr Tigue said this would fall to 10 per cent within the next two months.

Mr Tigue said the reason gearing would fall was because of his view on the valuations of stocks at present.

“Opportunities that were there a year ago are not there now,” he said.

This view extends to emerging markets where the manager said he was unsure if valuations had fallen enough yet to present buying opportunities because stock prices were still “not that cheap”.

The manager has 8.5 per cent of his portfolio exposed to emerging market stocks, just more than half the 15 per cent he held at the end of 2010.

Elsewhere, the manager said the trust would soon benefit from the expiry in December 2014 of a costly debenture, a loan the trust previously took out of £110m at an interest rate of 11.25 per cent.

Mr Tigue said he and the board were “wrestling” with what to do with the money which will be at the trust’s disposal once the debt instrument expires and interest payments stop.

A note from Winterflood Securities said the debenture’s market value would fall to par in December 2014 adding £15m or 2.5p per share to the net value of the trust’s assets.

On a stock level, the manager said that while merger and acquisition activity remained at low levels, he saw private equity as a potential beneficiary.

Mr Tigue said the trust’s 16 per cent weighting toward private equity generated a cashflow of £30.5m in the first six months of the year, something he thought could increase if he saw a rise in mergers and acquisitions.

“The level of mergers and acquisitions could turn quite quickly which would have a positive effect on private equity,” he said.

“There is much less hassle and regulation to buy a private company.”

Subject to shareholder approval at the annual general meeting in April next year, the final dividend on the trust will be 2.7p.