F&C is the oldest investment trust in the world, and the oldest surviving collective investment fund of any kind. Being in the FTSE 100 will likely boost prospects for existing shareholders as passive investment products that track the FTSE 100 will now buy the shares.
It is now run by Paul Niven for Columbia Threadneedle after that firm acquired BMO GAM, which had previously acquired F&C.
At the end of August the trust was £5.4bn in size, with £630mn of that in private equity and £280mn in cash, with its strong outperformance over the past year and share buy back policy leading to relatively strong share price performance while many other stocks collapsed in value.
Being a constituent of the FTSE 100 means it will be bought by FTSE 100 tracker funds as opposed to the FTSE 250 trackers, which buy mid caps. As there are far more FTSE 100 trackers than mid-cap trackers, inclusion in the FTSE 100 is likely to boost demand for F&C shares and also the liquidity of the stock.
Niven says they reduced exposure to small caps earlier this year, and so the listed equity exposure is now in large companies.
“The increase in size of the trust has not led to any significant change in where or how investments are sourced or selected due to our focus on large capitalisation stocks in the listed space and selective private equity investments through both unlisted fund structures and co-investment opportunities.”
Performance over all recent time periods has been strong, with the trust being in the top quartile over one, three and five years. Over the past year to September 9, the trust has lost just over 1 per cent, while the AIC Global sector is down 27 per cent.
Investment position
That performance can probably be seen in the context of the trust, which invests in global equities, having large exposures to US technology stocks such as Tesla, Amazon and Apple – precisely the sector that has been hit hardest during the equity market turbulence of the past year.
Niven says that while he is disappointed to have posted a negative return, this may have been minimised by his actions in reducing the amount of borrowing the trust undertook, and instead holding a relatively large position in cash.
“First, we reduced net gearing, raising [around] £300mn of cash in the first half. Second, we have sold a substantial amount of US growth stocks in the past two years, totalling in excess of $800mn (£691mn).
We have reinvested into a number of areas but focused on US large cap value. Paul Niven, F&C Investment Trust"We started to sell [in the second half of] 2020 due to: a) concerns over relative valuation levels; and b) expectations of a changed macro environment of higher inflation and interest rates. The majority of sales took place in 2021 and we also reduced further in early 2022."
Niven continues: "We have reinvested into a number of areas but focused on US large cap value, global income stocks as well as continuing to make commitments to private equity.
"Third, we divested in entirety from global smaller company stocks. Fourth, we further reduced a long sterling hedge on the portfolio. This had been around £300mn at the start of 2021, was £200mn at the start of 2022 and was around £30mn at the end of the first half. These sales of sterling took place before the marked fall down to multi-year lows.”
Mick Gilligan, who runs the model portfolio service at Killik and Co, says the trust’s size has enabled the costs to be kept low, while the global nature of the trust means it can be flexible.
He says he believes the share price has benefitted over recent months from investors anticipating the trust’s entry in the large cap index.
Buy backs
Gilligan adds: "Fixed costs such as directors' fees and audit fees are lower as a percentage of total assets and bid/offer spreads are lower. Another benefit of scale is the flexibility to buy back shares, which adds value for existing shareholders, without having to worry too much about the resultant shrinkage in the share count.
"F&C bought back 1.8 per cent of its equity last financial year. This added 0.1 per cent to total shareholder performance. While not significant in that particular year, it does help to offset costs and the company can buy back up to 15 per cent per financial year – something that small investment trusts are not able to do to the same extent.”
Buying back its own shares to boost performance can also help in falling markets.Investment trusts' buying back their own shares might be expected to boost the share price in the short term, but means the market cap of the trust shrinks, making it harder to attain a place in the FTSE 100.
But buying back its own shares to boost performance can also help in falling markets because if the cash used to buy back the shares had been deployed into equity markets the likelihood is it would have generated losses, whereas buying back the trust’s own shares generated the modest gain of 0.1 per cent referenced by Gilligan.
Ewan Lovett-Turner, head of investment trust research at Numis, says the ongoing charge of 0.54 is “low”, while the trust has also achieved 52 consecutive years of dividend growth, which makes it popular with retail investors.
That there is increased demand for the trust’s shares among retail investors is borne out by F&C being one of the top 10 most bought on the Interactive Investor platform, returning to that spot for the first time since 2020.
Lovett-Turner says the trust also invests in private equity strategies, and says these were a strong contributor to performance over the past year, even as the technology stocks have hampered returns.
Niven, who has been responsible for the management of the trust since 2014, oversees the investment management. But he delegates the individual stock selection both to colleagues within his firm and to external fund managers for UK large cap investments.
It is not F&C’s first foray into the large cap index; how long it lasts this time may be dependent on market sentiment.The internal managers on the trust also work on the other multi-asset funds operated by Columbia Threadneedle – a team of 21 investment professionals in total.
Dzmitry Lipski, head of funds research at Interactive Investor, says the trust tends to be well diversified and so tends to be a long-term core holding for investors.
F&C’s entry into the FTSE 100 comes at a time when the other global trust in the large cap index, Scottish Mortgage, has seen steep share price declines, attributed largely to that vehicle's holdings in unquoted and early stage companies.
It is not F&C’s first foray into the large cap index; how long it lasts this time may be dependent on market sentiment towards the racier part of the investment market, areas that F&C investment trust has largely avoided in the 100-plus years of its existence.
David Thorpe is special projects editor of FTAdviser
