Caledonia Investments 07 November 2018
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Caledonia Investment Management
Association of Investment Companies (AIC) Sector
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
Turnover Ratio %
Discount (Cum Fair)
The principal aim of Caledonia is to grow capital and income over the long term, while managing the risk and volatility of the returns. Consistent, dependable dividend growth has been a stand out characteristic for the trust and has led to its inclusion in the AIC dividend heroes after 50 consecutive years dividend growth.
A key characteristic of the trust is the vast business network that the internal team at Caledonia has established. They see these contacts as a vital part of identifying opportunities, particularly in the unquoted markets. Additionally, their long-term reputation as a supportive and constructive long-term investor enables the team to further develop this network.
The portfolio is comprised of four segregated pools, each with different managers and mandates. The Unquoted and Fund pools are where the majority of the returns are expected to come from, both with forecasted returns ranging between 12-15% per annum. The Income pool and the Quoted pool help grow the dividend and feature listed companies, which offer added liquidity to compensate for the unquoted companies.
The trust's largest geographical weighting is towards the UK, which made up 33% of the portfolio as of the most recent factsheet (September 2018). North America (27%) and Europe (20%), also play important roles in the make-up of the portfolio. The trust offers lesser levels of exposure to Asia (14%) and holds 6% cash.
Caledonia uses the FTSE All Share as its performance benchmark, and over the past five years has outperformed delivering NAV returns of 55.7%. However, in comparison to the MSCI ACWI and the AIC Global peer group, the trust has struggled to keep up. This pattern is also seen over more recent times, when the trust has outperformed the benchmark but again underperformed the MSCI ACWI and the AIC Global peer group.
Currently the trust is on a significant discount to NAV of around 25%. This is the widest discount in the AIC Global peer group.
Currently, the discount of Caledonia is extremely wide at around 25%, in particular when compared to the AIC Global peer group where the weighted average is c.-1%. We believe this may be a reflection of the fund’s exposure to unquoted assets, as well as its poor performance relative to the AIC Global peer group and the MSCI ACWI.
In our view, much of the trust's relative poor performance can be accounted for by its large weighting towards the UK and underweight position in North America. The managers are also relatively defensive, which has meant that more “growthy” peers have outshone the trust.
Looking forward, we do not see any reason for the discount to significantly narrow, unless the performance is able to pick up relative to its peers. With this said, the trust does offer something for everybody and for long-term investors, looking for a diversified and dependable income, the current discount may offer an attractive entry point.
|Long-term track record of dividend growth
||Poor performance relative to its peer group
|Interesting mix of public and private investment opportunities, managed by experienced team with long term view
||Relatively expensive OCF, despite the trust being self-managed
|Extremely wide discount could offer an attractive entry point
||Difficult to see a catalyst for re-rating given family ownership stake