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Trust Insider: Foreign & Colonial risks being left behind by investor fashion

by James Carthew on Jan 21, 2014 at 00:01

Trust Insider: Foreign & Colonial risks being left behind by investor fashion

I have been writing about trusts for some time now but I have neglected the oldest and one of the largest funds, Foreign & Colonial (FRCL) so I thought this week I would remedy that.

FRCL, which celebrated its 145th birthday last year, is the third largest of the big global generalist funds, behind Alliance Trust and Scottish Mortgage , with net assets of £2.4 billion.

FRCL has had the same manager, Jeremy Tigue, since 1997. It aims to generate long-term capital and income growth by investing in an internationally diversified portfolio of both listed and unlisted equities (up to 5% of the portfolio can be invested directly in unlisted companies but FRCL also invests in private equity funds, combined these will not exceed 20% of the portfolio).

The managers can gear up to a maximum of 20% of shareholders’ funds. There is some expensive gearing in the form of £110 million of debentures carrying a coupon of 11.25% but this is due to be repaid at the end of 2014 – good news as this should boost the income account. They can also use derivatives to boost income and manage currency exposure.

The fund is benchmarked against the FTSE All-World Index. Prior to 1 January 2013, the benchmark had a bias to stocks listed in the UK as it was 40% FTSE All-Share and 60% FTSE World ex UK.

Lagging peer average

FRCL’s long-term performance lags the average of its competitors, up 141% in net asset value (NAV) terms over 10 years against 154% for its peer group, but it is closer to the average over shorter time periods, outperforming by 3.9% over three years and underperforming by just 0.8% over the past year.

It has been using buy-backs to control its discount volatility. This seems to be succeeding as the discount moved in a very narrow range over the past year – between 9.1% and 11.4%, the lowest range of any major fund bar City of London.

The discount is not narrowing, however. FRCL pays quarterly dividends that add up to a yield of 2.2% – slightly more than the average yield for the peer group – and has a record of increasing its dividends in each year for the last 43 years.

Twenty odd years ago, when I started investing in the sector, global generalists were out of favour with investors. The problem was their share registers were dominated by institutional investors and, as these investors had become more sophisticated, a common refrain was that they wanted to make their own asset allocation decisions and therefore they preferred to invest in regional/country specific portfolios or invest directly.

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1 comment so far. Why not have your say?

Keith Cobby

Jan 21, 2014 at 09:30

Good feature, thanks James. I have been a long term investor in FRCL and my son is also invested through his CTF. I think the private equity investments have been a mistake and am pleased that these are being reduced over time.

The other drag on performance, which James didn't mention, is the expensive debenture which expires this year. This will give a nice boost to the income account.

I see FRCL as a core holding to be held (probably) indefinitely. I would trim the 600+ holdings a bit but the Trust is an alternative to the more focussed portfolios of Alliance, Scottish Mortgage, and Murray International (all of which I like).

When the markets and commentators are full of doom and gloom, for reassurance, I re-read the histories of these old global trusts. They have survived wars and economic collapse.

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