Formerly the Foreign & Colonial Investment Trust, it was launched more than 150 years ago in 1868, as its current manager Paul Niven explains.
“The original aim of the company was to give those of moderate means the same opportunities as large capitalists of the day to take advantage of financial markets,“ he says. “It was really about democratising investment for the masses.”
In its early days, this meant investing in emerging market bonds - the government debt of foreign and colonial countries. Later the company moved into credit and in the 1920 into shares. By the 1960s the trust was primarily buying equities and the 2019 version is an investment trust with a portfolio of global shares and unlisted equity.
As an investment trust, it is itself a company and investors buy shares in it. This gives Niven flexibility that more traditional ‘open-ended’ funds do not have. In particular, it can borrow to invest, and has recently secured debt that can be repaid over 40 years at interest of 2.7%. If investment returns are ahead of that, this creates value for shareholders.
Additionally, the trust can hold back revenues in order to better manage the dividend income that it pays investors. Right now the trust has £100m in reserve for this purpose. That’s a great comfort for income investors because it means the trust has been able to pay a dividend for 150 years in a row, and that dividend has risen in cash terms for 48 consecutive years.
One further benefit of its investment trust structure, as Niven explains, is the ability to take long-term positions in unlisted companies - those which have not listed on public stock markets. It does this by investing in private equity funds but also through co-investments direct into companies.
“We have the ability to take a long-term view because we don’t have to contend with having to sell assets when we suffer outflows, as an open-ended fund has to (because the share price can simply fall). We can lock up capital buying illiquid investment. That’s an extra risk but it also creates a return premium.”
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This approach proved valuable in the last year, Niven says, when wider equity stock markets were weak. The trust’s private equity portfolio - about 8% of the total portfolio - delivered a 20% return as listed shares struggled - making a meaningful positive difference to performance.
The trust is also proud of its history as an active investor which wields its power to improve behaviour among the companies it invests in. As Niven explains: “We believe sustainability is very important and that good governance and aligning the interests of shareholders and management adds value in the long run. We consider that when we invest but we also engage by voting our shares, we’ve engaged with 150 companies in 125 companies to improve governance.”
That means on issues such as executive pay and diversity, which Niven says are increasingly important to the long-term viability of companies.
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