Kepler Trust report: F&C Investment Trust

One of the world’s oldest investment trusts, F&C Investment Trust is on course for its 49th year of consecutive dividend increases.

William Sobczak is an analyst at Kepler Trust Intelligence.

Summary

One of the world’s oldest investment trusts, F&C Investment Trust (LSE:FCIT) is a behemoth of the AIC Global sector, with almost £4 billion in AUM.

The company, over 150 years old, utilises a fund of funds approach, employing BMO’s specialist teams and third-party managers to invest in global equities. According to JPM Cazenove, the company has over 500 holdings across a wide range of geographies and sectors. On top of this, the managers hold both listed and unlisted securities, helping offer investors access to companies and sectors they might otherwise struggle to have such access to.

The company is on course for its 49th consecutive year of dividend increases, having paid a dividend every year since launch. Income is not the main focus for the manager, however, and the fund is positioned to deliver long-term growth in capital via an internationally-diversified portfolio. This has been shown since Paul Niven took the helm in 2014, delivering decent NAV total returns. Over the period the company has outperformed both the Global AIC and IA peer groups, although has underperformed the FTSE All-World benchmark.

The discount widened out to double digits after the referendum; since then it has narrowed significantly. It currently stands at 5.3%.

Portfolio

The aim of the trust is to secure long-term growth in capital and income through an internationally diversified portfolio. The trust has now been running for over 150 years, a period that has been marked by the continuous evolution of the portfolio. Initially, the constituents of the portfolio were predominantly emerging market bonds with investments spanning Europe, the Middle East, New Zealand, South America and North America.

Over time, the portfolio has expanded to include corporate bonds, equities and private equity. As can be seen below, the FCIT portfolio is made up of inputs from both BMO’s specialist teams and third-party managers, and Paul believes the combination of listed and unlisted securities is a key feature of the trust, which helps both to reduce risk and to limit the volatility of investment returns.

BMO aims for low turnover of the primary managers, though there was a reshuffle a year or so ago as some of the third party private equity fund-of-fund investments were run off. Now, the team is hoping to use the private equity investments as a more focused and opportunistic tool, investing predominantly through BMO's global resources as opposed to through other managers.

Managers are divided up by geographical exposure, as can be seen below. The largest weighting is towards North American equities, making up 55.6% of NAV. Europe (ex UK) and emerging markets also make up considerable portions of the portfolio with 15.4% and 11% exposure respectively.

Risk management is a particularly prevalent aspect of the portfolio and is achieved via diversification across geographies and sectors. With this said, there are no specific geographic or industry sector exposure limits for the publicly-listed equities. However, no single investment can exceed 10% of the value of the portfolio, and no unlisted security can be greater than 5% of the value of the portfolio. Alongside listed and unlisted securities, the manager is also allowed to use derivatives for income enhancement.

Gearing

The manager is permitted to gear up to 20% of net assets, although gearing typically sits between 7% and 14%. Over the past year, the gearing has been toward the bottom end of the range, averaging 7.5%. The range for the period has been between 9% and 6.5%.

Since 2013 the cost of gearing has substantially reduced, principally due to a change of debenture in 2014 – which had a fixed rate of 11%. This has meant that the weighted average cost of debt has decreased from 7.1% in 2013 to 2.8% last year. This once more reduced in June, when the team decided to take advantage of the low interest environment. It drew down £150m in tranches of maturities ranging between seven to 40 years. The blended rate of this latest issue of debt is 2.2% and it takes the average rate on its borrowings down below 2.5%.

Performance

The trust has delivered decent NAV returns (c. 88.5%) since Paul took over the portfolio in 2014, only marginally underperforming the benchmark FTSE All World (89.1%). The trust has outperformed both the IA and AIC Global peer groups, which have delivered 70.6% and 83.3% respectively.

Looking in greater detail, over the past five years the manager has (with the FTSE World as the calculation benchmark) added an annualised alpha of 0.43, putting the trust in the middle of the AIC peer group for excess return relative to the benchmark. As one might expect with the emphasis on risk management, over the same period the trust had a relatively low standard deviation of 10.16.

In more recent times, the performance has been varied. Over the past year, to 8 October 2019, the trust has NAV total returns of 6%. This compares to 8.9% from the benchmark and 6.7% and 7.6% from the AIC and IA peer groups respectively.

The trust held up reasonably well during the correction of Q4, outperforming the IA and AIC peer groups. However, despite posting its strongest NAV total returns for over 20 years in H1 of 2019 (14.4%), the trust lagged the peer group. This was primarily due to the recovery in the public equity markets not feeding through to valuations in the private equity market. As such the private equity portfolio lost -1.4%.

Dividend

FCIT has a paid a dividend every year since 1868. This includes 48 years of consecutive dividend increases, making it the fifth longest record of consecutive dividend increases of all the AIC's ‘dividend heroes’. The 2018 dividend equated to 11p per share, and this was 5.8% higher than the 2017 dividend. Dividend growth over the past decade has been 5.5% and 7.1% over the past 20 years.

In September the board announced the second dividend for 2019, a payment of 2.9p per share, which compares to a 2.7p dividend for the third interim this time last year. It is the intention of the board to deliver another rise in dividends for 2019, which will mark the 49th year of increases in annual dividends.

Management

The trust has an impressive record of long-term managers, and over the past 150-plus years there have only been 11 different managers. This includes only three since 1969.

Currently at the helm is Paul, who has managed the portfolio since July 2014. Paul is supported by the rest of BMO, which offers a wide range of resources across the world. This helps the team to uncover opportunities often overlooked by other companies, as well as access private equity investments other managers might not be able to.

Paul is also a managing director and head of Multi-Asset Solutions – a £30 billion AUM business within BMO. Paul has worked at BMO since 1999, after undertaking a fund management position in Pacific Basin Equities. He has had responsibility for the management of multi-asset mandates within the group since 2002 (including large portfolios for insurance clients) and is chair of the Investment Policy Group.

Discount

The EU referendum in 2016 saw the trust’s discount widen to levels unseen since the financial crisis; however, this has narrowed considerably over the past three years. The start of 2019 saw the trust trade at a premium of around 1%; however, this has since slipped to the current level of 5.3%. This is marginally wider than the rest of the sector, which has a weighted average of 3.5%, and a one-year average of 1.7%.

In terms of discount control, the board previously had a threshold of -10%, but this was reduced to -7.5%, and has now been completely removed. With this said, the board will continue to use buybacks if it sees fit. Over 2019, 603,517 (542,677,195 in issue) shares have been added to treasury.

Charges

The trust has an annual management fee of 0.365% of market cap paid to BMO Global Asset Management and the trust also pays direct fees to its external managers. The ongoing charge of 0.65% is greater than the AIC global arithmetic mean of 0.71% and 0.19% more expensive than the weighted average.

The KID RIY for the trust currently sits at 1.12%, relative to a weighted average in the sector of 1%. With this said, calculation methodologies can vary among companies.

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