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Foreign & Colonial stretches divi record to 45 years

UK's oldest investment trust hikes dividend for 45th successive year but has fight on its hands to keep share price discount in check.

 
Foreign & Colonial stretches divi record to 45 years

Foreign & Colonial (FRCL ), the UK's oldest investment trust, has raised its dividend for the 45th successive year but faces a fight on its hands to keep its shares' discount to net asset value (NAV) in check.

Unveiling its full-year results, the trust proposed a final dividend of 2.7p per share, which will bring the total payout for 2015 to 9.6p, a 3.2% rise on 2014's 9.3p payment.

That will mark the 45th successive year of dividend increases, bringing the trust in line with its stable mate F&C Global Smaller Companies (FCS ).

Only four investment trusts boast longer track records of raising their dividends. City of London (CTY ), Bankers (BNKR ) and Alliance Trust (ATST ) have done so for 49 years, while Caledonia Investments (CLDN ) has a 48-year record.

'We recognise the importance of a rising income stream in real terms for our shareholders and it is a clear focus of the board that we maintain our long-term dividend growth ahead of the rate of inflation,' said Simon Fraser, chairman of Foreign & Colonial's board.

'While the economic outlook remains uncertain, and we may well see some pressure on certain dividend payers within the portfolio, the board is planning another dividend increase ahead of inflation for 2016.'

Battling discount

But the board has a fight on its hands in battling the discount of the trust's shares to their net asset value. The trust has been one of the most proactive in buying back shares in order to rein in the discount, spending an astonishing £771.2 million on its own shares over the past decade.

Last year it strengthened its discount control mechanism, tightening its target to 7.5% below NAV from the previous 10%.

In 2015, it was able to meet this target without splashing as much cash on its shares as it had in previous years. Over the 12 months to the end of December, it spent £14.8 million on buy-backs, less than half the £31 million it shelled out in 2014. And these figures are dwarfed by the £121 million spent in 2009 at the height of the financial crisis.

The buy-backs paid off, with the shares' discount narrowing from 8.1% at the start of 2015 to 7% by the end of the year, meaning shareholders enjoyed a 9% total return over the 12 months, ahead of the increase in NAV.

But since then the discount has increased to 9.4%, alongside a broader widening of discounts among investment trusts amid the market falls. This has brought its 12-month average discount to 8%, according to Numis Securities, above the trust's target.

So far this year, the trust appears to be ramping up its efforts. Stock market filings since the turn of the year show the board has spent £11.8 million on buy-backs, more than three-quarters the amount for the whole of last year in the space of just over two months.

'The board will continue to review its buy-back policy,' said Fraser. 'We retain the aspiration of seeing the company's discount narrowing further towards the long-held aim of the shares trading at or close to net asset value and with the ultimate future resale of shares from treasury.'

Private equity boost

The trust's solid result for 2015, in a year when global stocks rose just 4%, was helped by strong performance in its private equity investments, an unusual feature for a mainstream global investment trust. The trust's portion of unquoted investments rose 13.9% over the period, a result bettered by its exposure to Japanese companies, which rose 22.2% ahead of a 17.6% rally for the country's broader stock market.

Exposure to private equity, at 9.4% of the trust, has fallen in recent years as investments made between 2003 and 2008 have matured, but new buys are planned. This will be coupled with a new approach, with the trust, which has previously relied on investing in other private equity funds, likely to make investments directly in unquoted firms.

'Returns, net of fees, from our private equity investments have substantially exceeded those from listed equity markets and, as a result, the decision to commit to this area more than a decade ago has added value for our shareholders,' said Fraser.

'Looking forward, the board have been engaged with the manager over future commitments to private equity investments and we have agreed that we set up a new structure for future private equity commitments that will draw on our manager's internal expertise in private equity more directly.'

The trust's outperformance in 2015 was notable in its US stocks, which rose 10.6% over the year versus a 5.4% stock market return, and the UK, where the trust returned 4.1% against a 0.8% stock market loss.

Emerging markets dented performance, with the trust's shares from the region falling 7.4%, but that was better than a 9.7% drop across broader developing stock markets.

Manager Paul Niven said he was braced for a difficult year for stock markets, but added stresses prompted by fears over global growth could throw up opportunities.

'The palliative effects of monetary policy are diminishing and, with the US, and eventually the UK, likely to raise rates further, global stresses are likely to increase,' he said.

'China remains the current epicentre of structural and cyclical concerns for investors and, given the nature of their domestic policy, it is likely that markets will grapple with policy makers' intentions and broader implications for some time yet. We remain mindful of the scope for opportunities amongst the stress that is evident within financial markets at present.'

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