Back in 2009, Foreign & Colonial Investment Trust's (FRCL) relatively large exposure to private equity was a big problem and causing a drag on performance. Jeremy Tigue, the trust's manager, was feeling "gloomy", telling Investors Chronicle about the risk that the private equity model was broken because so many people were over committed.
The first big investor to go into private equity, the trust had held at least 5 per cent in private equity for more than 60 years. But, in 2006, it decided to increase its exposure to private equity to 15 per cent of the portfolio.
The cash didn't start coming back to the trust from its private equity holdings until 2011, when it received £6 million net cash flow. So far this year, the trust has received £60m in cash, which Mr Tigue describes as "nice rather than life changing". "We're using it to reduce borrowing," he says. "Now is a time to be cautious." The private equity exposure will stay until 2016 when its continuation is up for debate.
Foreign & Colonial Investment Trust is the UK's oldest investment trust, founded in 1860, and is used as a core investment by many private investors. Institutions are less than 10 per cent of its client base - the shareholders are mostly private investors. The trust aims to secure long-term growth in capital and income through a highly diversified portfolio of global investments.
Another reason for Mr Tigue to be positive is that the trust's expensive debt will fall away at the end of 2014. In 1989, the trust borrowed £100m on a market cap of £1bn for 25 years at 11 per cent annual interest rate. "We are one of the first investment trusts to reach maturity of debt - Edinburgh Investment Trust is another," he says. "We're thinking of borrowing again for the longer term."
Before 1 January 2013, Foreign & Colonial (F&C) was benchmarked against a composite of 40 per cent FTSE All-Share and 60 per cent FTSE World ex UK. Since the start of this year, the trust has been benchmarked against the FTSE All World Index to better reflect the global nature of its overall investment portfolio.
The trust is conservatively managed, but has outperformed its benchmark over the long term, with the share price up 85 per cent over five years to 10 November 2013, compared to 76 per cent from the FTSE All World Index. This year, the share price is up 20 per cent in line with its benchmark and dividends up 5.7 per cent. "Generally, we try to increase dividends by more than inflation," says Mr Tigue. "We could see that the debenture maturity would make the dividend go up. Plus, as allowed under investment trust tax rules, we had a revenue reserve. We didn't need such a big reserve, so we decided to distribute and spent one year's reserves."
Over the past few years, the trust has become much less focused on the UK. "We'll have below 20 per cent exposure in the UK by the end of this year, from 34 per cent at the end of last year," says Mr Tigue.
Mr Tigue has 38 per cent of the portfolio in the US. "The private sector in the US has been growing at 3 per cent - that's a nice recovery," he says. "The debt burden in the US has come down faster than expected."
He is currently mulling over what to do about his emerging markets exposure. "We started reducing our emerging markets exposure back in 2010 to 10 per cent." At the same time, he says F&C could see that people were "selling on our shares to buy Fidelity China in 2010 at the top of the emerging markets boom".
"Tapering in the US has a bad effect on emerging markets," he says. "The really interesting thing for 2014 is what will happen in emerging markets. The growth in the world economy has to come from emerging markets over the next 10 years. However, I don't think there is enough doom and gloom about emerging markets yet. There will be elections in India next year. There will be better opportunities in emerging markets next year."
He believes that European equities "may have run their course by now - having moved from acute to chronic". He has 10 per cent exposure in Europe.
He acknowledges that he made a "big mistake" in not going into Japan at the end of 2012. However, he says: "We caught most of the rally mainly via our yen borrowings. Half of the Japanese portfolio was hedged. Now we have 5 per cent in Japan. We're waiting for the third arrow. We've done the easy bit in Japan. I'm still sceptical about the long-term prospects for Japan - whether it can solve its problems."
F&C introduced a discount control mechanism eight years ago and has been trading at around 10 per cent discount to net asset value since then. However, Mr Tigue says: "We're not having to be as active about the discount management. In 2001, we were buying back £45m in shares and by 2012, it had dropped to £12m. This year it has been £6m. It feels like there is a lot of potential for the discount to narrow."
