Looking at the performance of the global fund of funds sector, it is remarkable how well the two F&C Managed Portfolio funds, managed by Peter Hewitt, are doing relative to their peer group. Many of these have defensive portfolios but this does not account for all of F&C’s recent outperformance. They are not big funds – the income pool has a market cap of £23 million and the growth pool £21 million, but in my view they ought to be a lot bigger.
There are quite a few quoted funds of funds out there. The largest is British Empire (market cap: £837 million). Managed by John Pennink, it has an impressive long-term track record. Then there is the £174 million market cap JP Morgan Elect Managed Growth Fund, managed by Katy Thorneycroft, which is predominantly invested in other JPM funds. SVM Global, managed by Colin McLean and Donald Robertson, has a market cap of £164 million. If we discount New Star Investment Trust (59% owned by John Duffield), SVM Global is the only one to sit on a material discount (14.7%). World Trust Fund, managed by Kun Deng at Lazard, is the only other fund to break the £100 million barrier.
The two F&C funds have returned around 25% over the past year in net asset value (NAV) terms, about 3.5% ahead of British Empire and JP Morgan Elect, 7.5% ahead of World Trust and 9.5% ahead of SVM Global. Both F&C portfolios are more heavily weighted to the UK than the peer group but this might reflect their FTSE All-Share benchmark. They are quite diversified, with a minimum of 25 investments in each pool.
The funds originated as a savings plan, listing in April 2008 after 95% of investors elected to convert their holdings into shares in the funds. Legally they are one company but have discrete portfolios. This is not a split capital trust and there are no limits on the ratio of income shares to growth shares. Shareholders can switch between the funds annually at minimal cost. The board can impose maximum and minimum limits on the amount converting.
There is a discount control mechanism in place on the funds; they will buy in stock if the discount exceeds 5% in normal market conditions. With both trading happily at a small premium to NAV they haven’t used the buy-back facility recently but have done so in the past. Shares are bought into Treasury and can be reissued at a profit if demand picks up – the F&C funds are part of a select band of investment companies who have successfully managed this.
The income fund pays quarterly dividends and trades at over a 4% yield. Income arising on the growth pool is effectively acquired by the income pool in exchange for a capital payment to the growth pool. I am not sure what they would do if the growth pool ended up being significantly larger than the income pool but guess they would ask the shareholders’ permission to cap the amount of income acquired. The portfolios largely consist of holdings in well-known names. The largest in the growth pool is a stake in British Empire and in the income pool it is British Assets. Turnover is fairly low.
Yes the total expense ratio (TER) may be higher than average because of the double layering of charges but, after fees, both pools have managed to outperform all but three of the directly invested global funds over the past year. High TERs are only a problem with poorly performing funds and those investing in low return assets.
The only element of the structure I am unhappy with is that F&C operates the same scaling up of shares not voted by savings plan holders that was widely condemned and withdrawn by Alliance Trust. It seems this is an ideal vehicle for private shareholders wanting a simple choice between investing for growth or income. It would be great if F&C could expand the trust.