In July, Paul Niven took over as manager of the £2.7bn Foreign & Colonial Investment Trust (FRCL), following the retirement of Jeremy Tigue.
Following in the footsteps of a respected manager and taking on the UK's oldest - it launched in 1868 - and best-known investment trusts is quite a responsibility. However, Mr Niven intends to maintain the trust's strategy and approach.
"We are not stock pickers, nor is this a concentrated investment trust," says Mr Niven. "But we are market-focused, equity-orientated and diversified. Diversification is about much more than combining different asset classes, and true diversification is difficult to achieve, particularly when you need it, so we look to achieve this across different approaches and investment horizons.
"We also believe risk allocation is the primary driver of returns, and we can extract this value with fundamental analysis."
Mr Niven and his team also believe it is important to have a cyclically aware tactical approach because prices can deviate from fair value in the short term.
Asset allocation is achieved by focusing on strategic and tactical positions, such as geographic or style exposure, and allocating between equities and other asset classes, for example the trust's significant exposure to private equity - nearly 14 per cent of assets.
Paul Niven CV Paul Niven has been manager of Foreign & Colonial Investment Trust since 1 July. He also is also head of multi asset investment at F&C, and is responsible for strategic and tactical portfolio construction, as well as manager selection across a range of F&C funds. He has worked at F&C since 1996, initially taking on a fund management position in Pacific Basin equities. Mr Niven has a BA (Hons) in Accounting and Economics from the University of Strathclyde, and an MPhil in Finance. He is a member of the UK CFA Institute. |
A key decision for the team going ahead will be whether to maintain the private equity exposure. "It is a mature portfolio now and we need to make a decision soon on whether to recommit or not," says Mr Niven. "We made a number of commitments between 2003 and 2008, and have done lots of work looking at this over the past few months."
Foreign & Colonial Investment Trust has 16 funds run by third-party managers such as Pantheon and HarbourVest which invest globally, across different sectors and vintage years. This ultimately gives the investment trust exposure to several thousand underlying companies. The private equity portfolio was valued at £368.5m at 30 June, and created positive cash flow of £39m in the first half of 2014. Mr Niven says that it is a good environment for private equity to realise value.
If the trust does reinvest in private equity it is unlikely this will be in listed private equity. "I don't want to take discount risk and I want access to true underlying exposure," he explains. "And an investment trust can take illiquidity risk because we have permanent capital. But I might consider listed private equity if we get another event where the discounts on listed private equity trusts blow out materially."
The trust's equity allocations are run both by F&C managers and some outside the company. "We have to strike a balance between getting potentially strong performance from external managers, and paying away some of the returns for that," explains Mr Niven.
Foreign & Colonial has debt (gearing) of around 7 per cent, which is down from more than 14 per cent at the end of 2012. The trust's debt facilities include a £110m debenture which matures at the end of this year. "We do have other facilities in place and will consider refinancing opportunities, but won't borrow long-term because of some concerns on equity market valuations," says Mr Niven. "Tailwinds to equities are dissipating and complacency is rising - but values are not too overextended yet.
"We have moved from an environment of cheap equity valuations and depressed fundamentals, to one of modest richness in equity valuations and high corporate earnings, at least in the US. Other regions offer catch-up potential. While valuations are similarly trading slightly rich in other developed regions, the potential for corporate earnings growth is greater."
Europe, which accounts for more than 13 per cent of assets, has scope for catch-up. "The eurozone may have to undertake full quantitative easing, but this market has the most potential to rally, especially if the euro falls," he says. "Peripheral and core economies are converging, inflation has fallen to a five-year low and corporate balance sheets are in strong shape."
The trust meanwhile has around 8.8 per cent of its assets in emerging markets, and according to Mr Niven they are "our greatest conundrum". "Sentiment towards emerging markets is turning more positive," he says. "They face structural headwinds, but investors are returning, overall risk in investing in emerging markets is falling and share valuations are attractive. But rising US bond yields are a risk."
Foreign & Colonial paid a 9p dividend in 2013, an increase of 5.9 per cent on the previous year, and for 2014 forecasts a dividend of at least 9.3p - a 3.3 per cent increase. The trust has increased its dividend every year since 1971, which has more than doubled in each of the past four decades. This is despite the fact that the trust has been unwilling to sacrifice capital for income and strong revenue. Mr Niven says going forward it is about "striking the right balance" but "expects the dividend to continue growing".
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