Foreign & Colonial Investment Trust (FRCL) is a large, globally diversified fund investing directly and through funds in listed and private equity using specialist sub-managers, aiming to achieve long-term growth in capital and income. Performance has improved over the last year while manager Paul Niven has completed the portfolio rebalancing started in 2013. NAV total returns are ahead of the benchmark and the global sector average over one, three, five and 10 years with a narrowing discount lifting total shareholder returns. The board has indicated a 45th consecutive annual dividend increase in 2015 to 9.6p giving a 2.2% prospective yield.
Manager Paul Niven’s views on asset allocation, risk and the use of gearing provide the basis for FRCL’s portfolio structure. Portfolio allocations are not driven by benchmark weightings and a key feature of FRCL is its c 10% strategic exposure to private equity. Strategic allocations are made across a number of regional and global strategies managed both in-house and externally, with tactical changes made to address short-term opportunities or threats. Although the portfolio is highly diversified with c 500 stocks held directly and many more through funds, most strategies are relatively focused with the majority using a bottom-up approach.
Although global equity market valuation multiples reached 10-year highs in early 2015, markets have subsequently retreated leaving potential for re-rating to support an upward move, and equity yields appear relatively attractive. While bond market yields have been rising, UK equities offer a significant yield premium to 10-year bonds which may persist in the absence of a sharp rise in interest rates. The outlook remains for global economic growth to maintain a positive trend over the next five years supporting prospects for corporate earnings growth. While a number of global macroeconomic uncertainties exist, which could lead to increased market volatility, positive developments such as the progress of Greek bailout negotiations have recently helped market sentiment.
In May 2015, the discount ceiling above which FRCL’s shares are repurchased was lowered from 10.0% to 7.5% as part of a progressive discount control strategy and FRCL’s share price discount to NAV (including income) has narrowed to sit close to the new ceiling. FRCL’s 2.2% dividend yield is the highest in a selected peer group of global funds with a market cap of over £200m and less than 25% UK exposure.