F&C Investment Trust (FCIT) aims to generate both capital and income growth from global equities, investing through delegated managers (both internal managers within BMO and external ones). FCIT is the oldest operating investment trust with over 150 years of history, and is currently run by Paul Niven, who also heads up multi-asset investment within BMO GAM (EMEA).
The strategies within the FCIT Portfolio are divided into regional and global sectors. While many strategies are run in-house, others such as the US equity allocation – the largest allocation – are run by two external managers. When deciding on the weighting each strategy is allocated, Paul uses a combination of top-down work and analysis of the diversification benefit each strategy provides. This diversification of FCIT is key for Paul, as he tries not to produce a portfolio that chases winners, but instead one that has a measured allocation to key global sectors and attractive investment styles.
FCIT is one of The AIC’s Dividend Heroes, with 49 years of consistent Dividend growth. The trust currently yields 1.6%, against the AIC Global sector’s 1.1% average. As discussed in the Performance section, despite having a focus on both capital and income Paul has generated an NAV total return of 103.8% since taking over management of FCIT in 2014, edging out its benchmark’s (the FTSE All World Index) 95.3% . While the fund has traded at a discount for most of the last five years, it has mostly tracked the AIC global equity peer group’s discount. After the emergence of COVID-19 FCIT has traded on an increasingly wider discount, detaching from the wider peer group. FCIT currently trades on a 9.5% discount.
FCIT offers investors a genuinely diversified way to access global equities, as unlike many of its peers it combines access to both listed equities and unlisted investments. In our view it could provide the core of an equity portfolio for those who want broad market exposure, or a one-stop shop for those wanting to invest in a single fund.
Paul has impressively delivered on his objectives of growth in both total return and income since taking over. Strong total returns have been achieved while maintaining the tradition of dividend growth he inherited from past managers. While some AIC Global trusts have outperformed FCIT, this has generally been through them taking big factor or geographical bets. The danger of this less diversified approach is the potential for underperformance when trends change, or of the end investor having to try to time the market, which is notoriously difficult. COVID-19 has led to some wide market divergences, for example between the US and the rest of the world, between growth and value, and between technology and everything else. In our view maintaining balanced exposures to these trends is wise at this point in time, something which is ensured by FCIT’s process.
We think FCIT’s current discount offers an attractive entry point, given that it has recently widened versus its historical level. While a diversified approach may not currently be in favour, given the strong outperformance of US and tech-focussed funds, we expect that to change over the course of the cycle.
|Increasing use of private equity improves diversification and differentiates offering||Higher manager risk given the use of delegated fund managers|
|Committed and considered approach to long-term income growth||May not be able to rotate positioning as quickly as peers in a fast-moving post-COVID market|
|Post-COVID discounts offers attractive entry point||Use of gearing can accelerate losses in falling markets|
F&C Investment Trust (FCIT) is a venerable behemoth within the trust world as it is the world’s oldest investment trust, having been launched in 1868, and it now has net assets of £4.1bn. The objective of FCIT is to achieve long-term growth in capital and income through a policy of investing primarily in an internationally diversified portfolio of publicly listed equities, as well as in unlisted securities and private equity, combined with the use of gearing. The strategy follows a multi-strategy approach to investing, but unlike traditional ‘fund of funds’ strategies Paul invests in a mix of tailored investment mandates, where he works with his delegated managers to tailor each strategy’s overall risk and return profile to his needs. FCIT has been named as one of The AIC’s ‘Dividend Heroes’, an award bestowed upon trusts which have a track record of at least 20 years of continuous dividend growth. FCIT has been managed by Paul Niven since 2014.
When allocating capital Paul does not look to solely maximise returns and income, but rather takes a nuanced approach. Rather than look at the risk/return profile of each strategy in isolation, he allocates with respect to the marginal allocation to risk of the portfolio, i.e. the incremental risk contributed by each strategy. Paul believes that diversification should be made through effective use of the strategy’s risk budget and that it is best not to make bets on a handful of factors by chasing potential winners while incurring increased volatility. He believes it is better to achieve incremental and steady returns through well-thought-out diversification, and that the portfolio should capture a range of sectors and regions to achieve this, which will end up capturing those winning factors but in a risk-controlled manner.
Paul also looks beyond the bottom-up contribution to risk when allocating and also uses a top-down approach as well, acting as not only manager of the FCIT strategy but also as head of multi-asset investment within BMO GAM (EMEA). Paul leverages his multi-asset skillset and in-house resources when allocating to regions and sectors, incorporating his long-term views of macro themes and market dynamics. Top-down factors are broadly considered under three areas: 1.) macro (economic and policy variables), 2.) valuation and 3.) behavioural. The macro view is informed by consideration of economic and policy factors, and by an understanding of how the economic cycle is playing out. Valuation reflects market pricing relative to notional fair value, across a range of different absolute and relative metrics. Behavioural factors include analysis of the sentiment and momentum within the market, often aspects which aren’t accounted for in traditional, more fundamentally focussed analysis. One example of a top-down trend Paul has identified is the large amount of debt accumulation, which necessitates financial repression and negative real yields. This typically benefits long-duration growth equities with the potential for valuations in these areas to rise further.
The portfolio is constructed in three broad strategy groups: regional, global and private equity, with each sub-strategy assigned to an investment manager. BMO, directly or through its affiliates, manages most of the current strategies, with external managers primarily used in the US and in private equity. When determining investment mandates, Paul aims to use a solution bespoke to FCIT’s needs. While these mandates may largely follow the pre-existing investment strategy of a manager, adjustments are made so as to best complement the current FCIT portfolio and to reflect Paul’s outlook. BMO managers are typically the default managers for FCIT investment strategies, a result of the natural synergies and price advantages that come from delegating to in-house investment managers. For Paul to use an external manager he needs to be confident that the incremental gains in long-term performance will exceed the additional cost incurred through higher fees. One example of the trust’s external managers is T. Rowe Price, which manages FCIT’s US growth portfolio. Paul acknowledges T. Rowe Price’s exceptional track record within growth sector investing, often ranking within the top decile of the trust’s growth strategies’ peer groups. It is because of this proven growth investment expertise that he is happy to pay the additional charges to access what he believes to be superior long-term performance.
listed equity allocation
||Active share %
||T. Rowe Price
||Barrow, Hanley, Mewhinney & Strauss
||Fundamental quality value
||LGM (BMO subsidiary)
||Systematic income GARP
||Core quality growth
||Pyrford (BMO subsidiary)
While listed equity strategies make up the core of the portfolio, unlisted private equity has, for many years, had a role to play within the FCIT strategy. Historically the legacy component has dominated FCIT’s private quality allocation (legacy being private equity investments made between 2003 and 2008, prior to Paul’s tenure in 2014), and these investments are managed by HarbourVest and Pantheon. The board has recommitted to private equity in recent years and these new private equity ventures have now surpassed legacy holdings, a result of new investments by Paul. Legacy holdings are being wound down with time. Recent investments in private equity have been directly into a number of fund holdings as well as several co-investments. Private equity allocations made in recent years have also had a greater allocation towards the UK and Europe, in contrast to the more US-focussed listed equity portfolio. While private equity carries with it more nuances than investing in liquid equity strategies, Paul does have several common factors which he considers when identifying investments. His target IRR is 25%, and each investment must be able to meaningfully outperform its public market equivalent. Future investments will incorporate a greater portion of growth and value managers, and access to the top-performing private equity managers is critical in this regard but the trust has taken steps to ensure access to such managers despite high demand for them.
private equity allocation
||active share %
||Fund of funds
Since 2013 FCIT has moved towards a truly global exposure within its listed equity strategies, having previously had an overweight to the UK (although it still maintains a UK and European bias within its more recent private equity allocation). On a look-through basis the portfolio has its highest regional weighting to North America, and its highest sector weighting to technology. In fact, when accounting for the private equity exposure (which biases the portfolio slightly towards Europe and the UK), we find FCIT’s region and sector exposures are broadly in line with the benchmark, the FTSE All World Index. However, the differences in sector allocations are partially a result of the difficulties in classifying private equity. The similarity between FCIT’s allocations and its benchmark’s occurs somewhat by design, given that Paul follows such a comprehensive approach to diversification while not taking factor bets, gravitating towards a de facto global allocation.
As we touch on in the Performance section, much of the recent performance of the AIC Global peer group has been driven by trusts which have the highest allocation towards the high-growth technology sector. This is a trend that FCIT has been able to capitalise on somewhat given its tech exposure, but not to the same degree as its less diversified peers.
Paul has an adaptive approach when meeting demands for both his income and growth objectives. As mentioned before, he considers issues other than top-down factors when weighting the portfolio, and he will also look through to each sector to estimate its expected contribution to the growth in both income and total return. Balance in terms of investment considerations is key, and while the trust aims to have a covered dividend over the cycle, there will be periods when this is not achieved. Nonetheless a focus on total return, rather than pursuing income for its own sake, is clear in the approach.
Structural gearing is a feature of FCIT, and benefitting from its potential to add to returns is in the investment objective. Since Paul took over the portfolio in 2014, the gearing has been steadily extended and refinanced at lower rates, with the weighted average cost of debt falling from 7% to 2.2%. There is also a revolving credit facility for short-term needs.
Since 2012 the trust has typically operated with gearing between a range of 6% and 14%, which has in general had a positive contribution to NAV as markets have risen. The maximum gearing allowed is 20% of NAV. Current gearing for FCIT (as at 27/10/2020) is 9%, and is above the 5% weighted average of its AIC Global sector peers (Source: JPMorgan Cazenove).
Last year, 2019, illustrated the benefit of being geared as markets rose and NAV grew by 1.9% thanks to the gearing. However, in the market falls of early 2020, gearing exacerbated the losses.
It should be noted that FCIT has a dual purpose to its return objective: it does not simply pursue the growth of NAV, but tries to balance it with the sustained growth of its dividend payouts. Even when considering the growth of NAV, Paul does not seek to produce a portfolio of certain winners but rather a well-diversified exposure to a raft of different sectors, as outlined in the Portfolio section. That being said, since taking over the trust in July 2014 Paul has been able to generate a cumulative NAV total return of 115.2%, ahead of the benchmark’s 106.3% over the same period (01/07/2014 - 27/10/2020, Source: Morningstar). As per the graph below, over the last five years FCIT has generated similar relative returns, with a cumulative NAV return of 73.1% versus the 73.8% of the benchmark and 71.9% of the peer group; having generated this performance while maintaining one of the best track records of dividend growth within The AIC.
The AIC Global peer group includes a wide range of manager types, including multi-managers, diversified listed equity strategies, and those with single-factor styles to name a few. Of the 16 trusts in the Global peer group, the closest in approach would be the five which could be considered multi-manager. As can be observed from the returns chart below there has recently been little difference between the performance of the multi-manager peer group and the broader global peer group, at least until 2020. This year the multi-managers, which are generally very diversified, have fallen behind the rest of the AIC Global sector as specialist trusts with a high exposure to technology and e-commerce – such as Scottish Mortgage (SMT) – have had outstanding returns. SMT’s large size means that it distorts the sector average too. Over the last five years, it is notable that FCIT has managed to outperform the more generalist multi-manager peers, which have returned just 61.1% on average.
discrete annual performance
FCIT has delivered outperformance, particularly on the downside, illustrating the benefits of a well-executed diversified strategy. It has outperformed the multi-manager peers in 2018 and 2020, and the AIC Global peer group in 2018 as well; however, this year the Scottish Mortgages of this world have rocketed away.
Over one year FCIT has returned 4.9% in NAV total returns against the benchmark’s 4.4%. However, thanks to the strong rally in the US, information technology and e-commerce, the peer group has outperformed FCIT since March. The trusts that have done the best are biased towards expensive high-growth and technology names which have been the main beneficiaries of COVID-19. This is in direct contrast to FCIT, which will suffer when individual factors outperform to this degree but is therefore also not exposed to the risk of this outperformance reversing. While FCIT has lagged the AIC Global peer group over one year, its diversified multi-asset peers have lagged even further, returning a mere 1.4% over 12 months. FCIT has had the second-highest one-year NAV return amongst its multi-manager peers.
FCIT is one of The AIC’s ‘Dividend Heroes’, an accolade given to trusts which have been able to grow their dividend each year for at least 20 consecutive years. It is currently on its 49th year of dividend growth, which is the sixth-longest track record in The AIC. The most recent full-year dividend, paid out in May 2020, was 11.6p per share and was 5.5% higher than the prior year’s. The current dividend yield for FCIT is 1.6% and is above the 1.1% weighted average of its peer group (as at 26/10/2020). Last year’s annual dividend was fully covered by revenues, with revenue coverage of 1.7x based on financial year-end data (as at 31/12/2019).
revenue and dividend per share
As mentioned in the Performance section, Paul takes a considered approach to maintaining the growth of the dividend, balancing the contribution to either total return or income growth through his sector allocations. As a result of Paul’s prudence, since 2016 the revenue return has exceeded the dividend paid, increasing the revenue reserve and helping to secure future dividend payouts.
The FCIT strategy is headed up by Paul Niven. Outside of managing FCIT he is also the head of multi-asset investment (EMEA) at BMO Global Asset Management, having joined BMO in 1996. He took over management of FCIT in 2014, before which it was previously run by Jeremy Tigue. Despite its more than 150-year history FCIT has been remarkably stable in its operation, having had only 11 managers in that time, and with only three since 1969.
While Paul determines the asset allocation and strategy selection, the selection of the underlying investments within each strategy is the responsibility of delegated investment managers. The majority of these managers sit within BMO, helping Paul to synergise with his delegated managers. A portion of the strategies is delegated to external managers, including the largest mandate, which is run by T. Rowe Price. While Paul cannot obtain the same synergy as he does with his colleagues at BMO, he has the utmost confidence in his external managers.
Over the last five years FCIT has on average traded on a 5% discount; however, by 2018 this became a premium. As can be seen from the below graph, FCIT’s discount was broadly in line with its broader peer group till 2020. At the start of 2020 FCIT traded on a c. 2% premium; however, the impact of COVID-19 has resulted in FCIT trading on an increasingly widening discount since March. Today it trades at a 9.5% discount (Source: JPMorgan, as at 06/11/2020). We believe that much of the recent widening of the discount is due to a few high-growth, tech-heavy strategies dominating the peer group’s performance. If these trends were to reverse, or at least fall out of favour, FCIT’s discount could narrow again.
The board has historically taken a proactive approach to the discount control, primarily through a policy of share buybacks. However, more recently there has been less necessity for such policies, and 2018 and 2019 saw two consecutive years of share issuance – the first in over a decade. The board has restarted the share buybacks in 2020 in an attempt to control the discount. It should be noted that FCIT has previously operated with a targeted maximum discount of 7.5%, which has since been removed. The board remains committed to using share buybacks to enhance shareholder value and pursue a policy of discount control when under normal market conditions.
FCIT operates under a tiered management fee system, linked to the market cap of the trust. This equates to a fee of 0.35% on the first £3bn of assets, 0.3% on assets worth £3bn to £4bn, and 0.25% on assets worth above £4bn.
The linkage to market camotivates the manager to maintain a premium, or to at least prevent a discount. The current OCF, which includes operating expenses in addition to the management fee, is currently 0.63%, which is above the 0.5% of the peer group. However, it should be noted that the OCF includes the management fee charged by the delegated managers. The current KID RIY is 1.16%, above the peer group average of 1.04%, although calculation methods vary by trust (Source: JPMorgan, as at 06/11/2020).
As part of BMO, FCIT can leverage BMO’s long history of sustainable and ESG-compliant investing. As an asset manager BMO operates with an independent team of ESG and responsible investment analysts whom its managers are free to leverage to better integrate ESG into their investment process. As an asset manager BMO aggregates the voting rights of its strategies, and such practices can be more conducive to having a genuine impact at shareholder meetings. Paul believes that companies with a strong focus on their material ESG issues have the potential to reduce the risks they face over the long term.
When using external investment managers, it can be difficult for a manager to assess the true ESG risk of their investment, as the extra layer makes the assessment of the true ESG risk of their investment opaque. To resolve this Paul leverages BMO’s responsible investment analysts to scrutinise the ESG procedures and voting policies of his external managers. One result of the integration of ESG into the FCIT process has been the increasing pressure placed on external US managers to engage with their pharmaceutical investments on drug pricing policy, ensuring their alignment with BMO’s principles on the matter. In addition, BMO’s stance as a market leader in ESG engagement led to the decision last year to bring in-house all the voting and engagement activities arising from the listed equity holdings via external managers.