Foreign & Colonial Investment Trust (FRCL) is the world’s oldest investment fund, heading towards its 150th birthday. Since 2014, it has been managed by Paul Niven, aiming to generate long-term growth in capital and income from a very broad portfolio of primarily listed global equities, although c 7.5% is invested in private equity. The manager is benchmark aware, but takes active positions versus the index allocations. FRCL has a progressive dividend policy; the board has proposed another annual dividend increase for FY17, which will be the 47th consecutive year. The trust’s NAV has outperformed its benchmark over one, three and 10 years, while performing broadly in line over five years.
Niven structures FRCL’s broad portfolio based on his views about asset allocation, risk and the use of gearing. The fund adopts a variety of strategies using both internal and external managers, along with an allocation to private equity, which means that FRCL has thousands of underlying investments. On a geographic basis, the largest deviations versus the benchmark are overweight exposures to Europe ex-UK and emerging markets, and a meaningful underweight exposure to the US. Gearing of up to 20% of NAV is permitted; it was 7.0% at end-July 2016.
Following a year of above average global equity returns in 2016 (particularly for UK-based investors as a result of sterling weakness), valuations are looking less attractive. On a forward P/E basis, some developed markets such as Europe, the UK and the US are trading at a c 20% premium to their 10-year averages. In such an environment, investors may be attracted to a well-established fund with a very diverse portfolio, including more attractively valued assets, such as Japanese and emerging market equities.
FRCL’s current 5.8% share price discount to cum-income NAV is narrower than the averages of the last one, three, five and 10 years (range of 8.1% to 9.4%). There is scope for the discount to narrow further if the manager continues to build on his positive investment track record. Meanwhile, the board actively manages the discount by repurchasing shares when the discount exceeds 7.5% in normal market conditions. FRCL has a distinguished dividend history; FY17 is on course to become the 47th consecutive year of higher annual dividends.