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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

The global generalist sector has been through a painful adjustment as these institutions sold their stakes in the funds but now it is increasingly being embraced, by private investors in particular, as a cheap, efficient way to access a diversified portfolio of equities even for those with a relatively small amount to invest. FRCL says it wants to be a core investment in an investor’s portfolio.

Another thing that has changed over the years is the way these funds are managed. FRCL is differentiated from its peers in one major respect.

If we leave Witan aside as it is a fund of funds, almost every other global generalist fund is now managed as a single portfolio, often with a relatively short list of best ideas in each sector drawn from around the globe. By contrast, FRCL is managed as a collection of regional portfolios with over 600 holdings, which was the norm 20 years ago.

I am increasingly convinced there is no single right way to manage money. However, the arguments for running one global portfolio rather than a collection of regional ones have persuaded most global generalists to go down the global portfolio route.

A simple way of looking at the issue is to pick a sector you might want exposure to, say pharmaceuticals. Does it make sense to buy pharmaceutical stocks in US, UK, Japanese and European portfolios or just buy the pharmaceutical stocks with the best or most profitable products regardless of where they are listed?

Intuitively, you might opt for the latter. But it is asking too much of any portfolio manager to have sufficient knowledge of all the available options in every sector across the globe. He or she must rely on others with expert sector or regional knowledge, collate those ideas and select a portfolio from them. Asking for the best ideas in each region or the best ideas in each sector ought, in the end, to amount to the same thing.

The way FRCL’s money is managed begs another question. With over 600 holdings, is it too diversified?

Cautious approach

FRCL says its diversification is a reflection of a cautious approach to managing the fund, but a counter argument would be that these good stock selection decisions do not have much of an impact on performance.

At the end of November 2013, the top 10 holdings accounted for just 14% of the portfolio and six of these were funds that themselves have a number of holdings. The largest equity positions were BP, HSBC, Glaxo and Shell (all listed in London, which could reflect an ongoing UK equity bias in the portfolio despite the benchmark change).

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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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