Foreign & Colonial Investment Trust: Positive About Global Equities

Foreign & Colonial Investment Trust (FRCL) is one of the largest and most liquid global equity trusts in the UK, with assets of c £2.5bn. It is highly diversified, with investments in more than 500 companies, across 30 countries. It pursues long-term growth in capital and income. It has a 42-year record of uninterrupted dividend growth and income seems likely to play a larger part in overall returns going forward. In general this reflects the paucity of growth opportunities across markets, but specifically it reflects FRCL’s on-going shift from non-yielding private equity investments towards higher yielding listed equities, as well as the prospect of lower funding costs on structural borrowing. Strong income reserves have allowed it to anticipate these portfolio shifts and the interim dividend, paid in September 2012, was rebased upwards by 33%. From February 2013 dividends will be paid quarterly.

Investment strategy: Asset and liability management
Jeremy Tigue has managed FRCL since 1997. He is responsible for the whole portfolio but concentrates his efforts on the strategic asset allocation of the trust and the management of liabilities (the amount, cost, and FX denomination of borrowings). Thereafter, selection of the individual investments is delegated to sub-management teams with specific expertise in countries, regions, and asset classes. These are mostly sourced from within F&C Asset Management, but external managers are also used when FRCL believes this will enhance its performance.

Outlook: Self help
The manager is generally positive about global equities over the medium to long term, especially comparing solid yielding equities with bonds. The global economy is still growing, innovation continues, and the corporate sector is generally robust but macroeconomic problems persist and recovery from the financial crisis is slow. In April 2012, FRCL fixed £100m of its debt at a blended rate (3.25%) that is lower than the dividend yields available on listed equity investments. Positive cash flows from maturing private equity investments and the repayment of a historically expensive £100m (11.25%) debenture in 2014 will further support future portfolio income.

Valuation: Discount in line with longer-term averages
The current discount, with debt at market of 10.3% is broadly in line with its longer-term averages of 9.9%, 9.8% and 9.0% over one, three and five years respectively but slightly higher than the AIC peer group (9.1%), whilst the dividend yield is slightly larger (2.5% vs 2.2%).

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