Foreign & Colonial Investment Trust (FRCL) is a large, globally diversified fund investing directly and through funds in listed and private equity; external managers are used for some strategies. Performance in 2015 was strong and to the end of February 2016, NAV total returns were ahead of the benchmark over one, three, five and 10 years. A narrowing of the discount in 2015 added to share price total returns. The announced 2015 dividend of 9.6p represents the 45th consecutive annual increase.
Manager Paul Niven’s views on asset allocation, risk and the use of gearing form the basis of FRCL’s portfolio, informed by the wider views of BMO Group managers. Sector and geographic exposure is not driven by benchmark index allocations. Although at the end of February 2016 the portfolio had more than 520 holdings, there is exposure to thousands of companies via fund and private equity investments. Historically, private equity has been managed by two external managers, HarbourVest and Pantheon, but these investments are maturing and in future investments in this asset class are more likely to be sourced internally.
Despite the Datastream world index 12-month forward P/E valuation being above the 10-year average, other valuation measures are looking more attractive. Comparing the yield of UK equities to 10-year government bond yields also highlights the relative attractiveness of equities. Global growth estimates, while reduced, do not indicate a recession and central bank monetary policies remain accommodative. Given the volatile stock market performance to date in 2016, despite macroeconomic uncertainties, there is the potential for an improvement in investor sentiment.
The board aspires that the shares trade at or close to NAV. As part of the strategy to narrow the discount, in May 2015 the discount ceiling above which shares are repurchased was lowered from 10.0% to 7.5%. The current share price discount to cum income NAV is narrower than the averages of the last three and five years. FRCL has a longstanding history of dividend increases; the current yield of 2.2% is above the average of the selected peer group of investment trusts with a market cap of more than £100m and less than 25% of assets invested in the UK.