Caledonia Investments

Despite CLDN’s useful approach to blending public and private equity investing, it trades on a wide discount….

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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 Investments

Caledonia (CLDN) is a flexible investment trust, offering investors a portfolio of listed and unlisted global equities. CLDN is a self-managed strategy run by a 17 strong team, headed up by its CEO Will Wyatt and has the objectives of growing both capital and income over the long run while doing so in a risk-conscious manner.

CLDN’s portfolio is broken down into three distinct asset classes: quoted equity, private capital, and funds. Quoted equity focuses on high quality listed equities and has a global remit to investing. The allocation is split into two portfolios: one focusing on growth and the other income. Private capital is a portfolio of nine unlisted companies, largely based in the UK, with the team taking majority stakes in the companies with the view to act as effective managers rather than mere shareholders. The fund category contains several private equity funds, investing in either the US or Asia, though the team have a very distinct approach to the two regions. We describe CLDN’s process and holdings in more detail in the Portfolio section.

CLDN has very clear objectives, to outperform FTSE All-share over a 10-year period, while also following a strategic (i.e. shorter-term) objectives of providing returns of at least RPI +3% to 6% in the medium to long term. CLDN’s track record of performance clearly demonstrates success in this regard, as we cover in our Performance section. CLDN has also a strong track record of continuous dividend growth, the second-longest of any investment trust. Despite its successes, CLDN continues to trade at a discount, currently 23.5%, wider than its peers and its historical average.

Kepler View

CLDN, in our view, offers investors a differentiated approach to global equity investing, whereby it combines listed equities with a majority position in unlisted companies, leading CLDN to provide its shareholders with strong-diversifying potential. In our view CLDN represents a typical ‘family office’ approach to investing, with a majority of the portfolio allocated to private equity due to the ultra-long time horizon of its investors. This time horizon does arguably allow CLDN to take a more discipled approach to private equity. However, we note CLDN also has a 32% allocation to listed equities, for the purposes of income generation, portfolio diversification and liquidity. While this might be an advantage to investors who use CLDN as their core equity allocation, it does diminish its overall diversification benefits and dilute the extra return potential in the private equity portfolio. As a result, CLDN is likely to have greater correlation to an investor's pre-existing holdings than a ‘pure’ private equity strategy would have.

CLDN is arguably best suited to investors with a very long-time horizon, as such a duration is required to fully realise the value in the private equity holdings. Such investments require investors to remain committed for many years (with the team taking a 10–15-year view for their own PE funds), as such a time frame allows investors to benefit from a company’s eventual IPO / sale. This means that while CLDN is a lower risk investment compared to its benchmark in terms of volatility, it may ultimately not be suitable for low-risk investors with a short time horizon.

bull bear
Combines listed and unlisted investments in a single portfolio
Private equity holdings add additional layer of valuation risk
Has achieved its long-term return objectives
Has underperformed broader global equities over the long term
Offer investors a lower-volatility approach to global equities
High KID RIY
David Johnson
David is an investment trust analyst and joined Kepler in September 2020. Prior to this he ran multi-asset model portfolios at a discretionary fund manager, and has worked in both asset management and investment banking during his career. He holds a Masters in Finance from the University of Warwick and is a CFA charterholder.

Fund History

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