F&C: why we’ve been selling US tech stocks

Manager of F&C Investment Trust (LSE:FCIT) Paul Niven breaks down the latest portfolio changes in the FTSE 100 trust. One of his big moves has been to move money out of US technology shares and into cheaper shares. He explains why the price you pay is important and why there is still too much of a premium placed on US tech. Niven also reveals why he does not own any smaller companies and why investors should be wary of tracker funds.

Sam Benstead, deputy collectives editor at interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Paul Niven, manager of the Super 60 rated F&C Investment Trust. Paul, thank you for coming in. The trust invests globally. Can you give me a whistle-stop tour of what you own?

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Paul Niven, manager of F&C Investment Trust:So, the trust does invest globally. We've got exposure to listed equities around about 90% of the portfolio and private equity, which is the remainder. We invest into a range of underlying strategies, which in turn invest in specific areas of the market. We've got eight to 10 individual strategies that invest into listed equities. So European exposure, US large-cap growth, US large-cap value, we've got a global income strategy and each of those individual strategies runs a concentrated exposure, maybe around 40 stocks in terms of the most attractive stocks that we see within that segment of the market. The reason that we do that is essentially to provide diversification across a range of different geographies, sectors, and investment styles. So, we're a broadly diversified portfolio investing in listed equity and private equity.

Sam Benstead: And what are your biggest underweights and overweights when compared with your benchmark?

Paul Niven: If you look at the portfolio in aggregate, geographically, we're not too different from the overall benchmark. We've got a long position on UK equities. We've got a modest, long position within the listed component on US equities. We're underweight in European equities and emerging markets, but those positions are not particularly big. If you look at the individual stocks, which we invest in, some of our key overweights in terms of the top 10 and bottom 10, for example, relate to Hess Corp (NYSE:HES), Phillips 66 (NYSE:PSX), both energy companies. Clearly, we also have overweight positions in UnitedHealth Group Inc (NYSE:UNH) and International Flavors & Fragrances Inc (NYSE:IFF), which is the provider of inputs to food manufacturers. Conversely, in the underweight side of things some of our biggest underweight are, for example, in Apple Inc (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), some of those big tech names which had performed extremely well.

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Sam Benstead: Let's talk about energy. What makes that such an attractive sector for you? Is it the higher-than-average oil prices, is it a supply-demand dynamic? What's going on there?

Paul Niven: One of the reasons we have this overweight to some of the specific names in terms of some of our key stock positions [has] really been the increased allocation that we've made to large-cap value stocks. And energy is clearly a more significant component of that type of portfolio than it is the market overall and the exposure that we've increased in terms of the income exposure in the portfolio.

So, the changes that we've made out of large-cap growth stocks into value and income have essentially led to that overweight position on some of those energy names as well as the underlying managers who manage those components selecting those stocks. The reason for the preference for those names really relates to an underpricing in terms of expectations against current stock price of what the manager believes the future oil price trajectories [are] likely to be, and continued supply shortages combined with clearly what has been quite a marked upturn in demand.

Sam Benstead: And why are you underweight America's technology giants. These have been amazing companies to invest in over the past decade, and anybody who's avoided them has been punished by markets. So why do you think that you are right?

Paul Niven: We did have a very significant position in terms of US technology stocks. We still have exposure, as I said, we made a conscious decision in the second half of 2020 to start reducing, materially reducing, our exposure to large-cap US growth stocks. If you compare our exposure from that point in 2020 to where we are now, we've got roughly half of the exposure that we did in terms of US large-cap growth.

Our view was that the fundamental backdrop was likely to change in the sense that we were going to see a rise in inflation, a rise in interest rates, both of which are less conducive to longer-duration growth stocks. In addition, we'd observed that the valuation premium on that area of the market had got to very large levels. So, the change in fundamental backdrop, which we foresaw, which has unfolded along with those extended valuations, led to us pivoting away from US large-cap growth. Doesn't mean those companies are not great businesses, they are fantastic businesses, but ultimately one has to be mindful about what price you pay for that exposure. And unfortunately, I think as things stand today, that premium is probably still a little bit rich in my mind.

Sam Benstead: Are there any types of companies or countries that you avoid completely? Take China, for example. Do you allocate money there?

Paul Niven: We do have exposure to China. We are slightly underweight in terms of our Chinese equity exposure. We did restrict exposure to Russia and Belarus following the invasion and divested as best we could from the very limited exposure which we had to those names. But beyond that, we have a broad universe from which we can select.

Sam Benstead: And you said that at the moment there's no allocation to global smaller companies. Why is that?

Paul Niven: Given the backdrop which we envisaged, which again, was rising inflation, rising interest rates, we felt that that was going be more conducive in terms of pricing power for large over small, rising labour costs. Large companies tend to have more by way of pricing power in terms of inputs, and that includes labour, they'll be numerous exceptions to this general rule. But in general, we felt it was [an] environment to be more conducive for large over small. That said, the valuation of smaller companies has improved markedly. But we wanted to be focused, concentrated, and given that it was a relatively small part of the portfolio we felt we should divest in the entirety, which is what we did.

Sam Benstead: The trust has been a great performer, particularly versus the peer group against the benchmark, it's winning over 10 years, but the difference is less substantial. So, why should investors own F&C rather than a simple tracker fund where there's no chance that the manager might make a wrong investment decision?

Paul Niven: As you said, we've delivered very strong returns in absolute terms over longer periods and relative terms over all periods. We've delivered top-quartile returns against the investment trust competitors year to date, one-year, three-year, five-year, and over 10 years. We delivered a return to shareholders of about 245% against our benchmark, which is about 215%. So, quite material outperformance over the longer time periods as well as good returns over shorter time periods as well.

The question about active management against passive management is one of customer choice. We have, as I said, delivered good excess returns. So, I think there's good proof statement there, the closed-ended fund structure which we operate gives us advantages in terms of being able to take a long-term perspective, use gearing and invest in illiquid areas such as private equity and that can be accretive to returns. And certainly, that has been our experience. But fundamentally, if you buy a passive fund, you're buying the winners of yesterday, given that you're buying the largest companies by virtue of their historic performance. So, our ability to take active positions, whether it's geographically, [or] centrally at the individual stock level, we believe can lead to excess returns, as we have demonstrated against indices over longer time periods.

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Sam Benstead: Private equity is one of those advantages. It's about 10% of the portfolio. Can you talk me through how you invest in private equity and what types of companies you own?

Paul Niven: So private equity, as I said, is running 10% of the overall investment portfolio, just a little over today, been a long-term investor into private equity. We have experienced a good level of excess return from our private market exposure over a long period of time. Albeit last year we had a return of around about 30% from a private equity portfolio. That compared to listed markets over a 20 year to date to the end of June, we delivered a return of 4.5 thereabouts, per cent return from private equity in a period when listed markets were down.

But I said over long time periods we've delivered good levels of excess return from that private over public exposure. So, we think as a closed-ended fund, we should take advantage of the ability to invest in illiquid areas in terms of private exposure. We invest into both unlisted fund investments and co-investment exposure, which is essentially stakes in individual companies.

And the way we do that and source those investments is by using our internal team within Columbia Threadneedle, who essentially source deals which are then brought to me as manager of the trust, which can then be put into the portfolio. And we also work with Pantheon, who are a leading investor in the private market space who source and select hard-to-access leading growth and venture managers on a global basis for us. And just one example, last year we realised an investment in pet supply stores in south-eastern Europe. We invested in 2018, and we made a return of just under €30 million and that is 4.2 times return on investment into that individual position. But we invest predominantly using the Columbia Threadneedle team in mid-market buyout opportunities.

Sam Benstead: Finally, the question we ask all our interviewees Do you personally invest in the trust?

Paul Niven: I do have exposure to F&C Investment Trust as part of my investment portfolio. I was a shareholder in the trust before I became manager back in 2014, and I've continued to invest on behalf of myself and my family.

Sam Benstead: Paul, thanks very much for coming into the studio.

Paul Niven: Thank you.

Sam Benstead: And that's all we have time for. You can check out more Insider Interviews on our YouTube channel where you can, like, comment and subscribe. See you next time.