Emma Wall: Hello and welcome to the Morningstar series "Why Should I Invest with You?" I'm Emma Wall, and here with me today is Paul Niven, Manager of the Foreign & Colonial Investment Trust (FRCL).
Hello, Paul.
Paul Niven: Hello Emma.
Wall: So you took over a couple of months ago from manager Jeremy Tigue, who had run the Trust since 1997, a 17-year tenure. How will things change under stewardship?
Niven: Well, I think a key point is that, any changes which are going to take place will also going to be evolutionary. The Trust has an extremely long history, founded in 1868, nearly 150 years and under Jeremy's stewardship, the performance has been very strong delivering growth in capital and income through time.
That said, clearly, we change with the times, we started to invest in an emerging market debt portfolio and in recent years, the Trust has become much more global in nature, reducing U.K. equities for example from around 35% just 18 months ago, down to a level of around 10% today, so much more global in terms of exposure.
In addition to that, we have around 14% in private equity and that portfolio is quite mature. So as we process through this year, it's relatively early days, we are going to look at all aspects of the portfolio and there are a number of decision points which would be reached, for example, we took out a long-term debenture 25 years ago, which yields a 11.25%, that's going to roll-off at the end of this year.
So we'll be refinancing that or using the existing facilities in order to replace that gearing, and also, looking at all of the underlying strategies which are in place on the Trust today.
Wall: I mean analysts have given this a Bronze Rating and that hasn't changed with your taking over, so they obviously have conviction. Another thing the analysts here at Morningstar draw attention to is the sheer volume of holdings in the Trust, I think it was something like 700 in December, will that change under you and how do you manage that number, it's vast?
Niven: Yeah, there are a large number of holdings on the Trust and a longstanding attribute of the Trust is one of diversification, which is one of the basic principles of investment. Now there is clearly a balance to be struck between having an appropriate number of holdings, while not overly diversifying and diluting the terms. It's certainly true that there are a number of areas whereby we merely to trim down the number of direct holdings.
So, as you mentioned, we have actually more than 500 individual stock lines, plus a number of fund holdings, plus a number of private equity holdings and I fully expect that in due course, in fact, in coming months, we are likely to trim the number of direct holdings down, really to sharpen up some of the underlying process and taking more concentrated approach in terms of strategies.
Wall: Because your mandate is so broad – you've mentioned there private equity taking a global approach – would you say that your job is more one of asset allocation, and then outsourcing those direct stock picking?
Niven: That's one component of the rule. I would say that there are a number of important aspects which consider in terms of management of the Trust. Firstly, strategic decisions in terms of the composition of the asset, I mentioned already you've got around 85% in terms of listed equity markets and 15% broadly in terms of private equity, so that's a big decision, because clearly private equity is illiquid and one of the advantages of Trusts is the ability to access an illiquidity premium, which has been a very successful strategy historically, so strategic asset allocation is very, very important from a long-term perspective.
Also within that, as I said, the composition of exposure, so the decision to come much more global in nature and to reduce U.K. from quite a significant portion down to a less meaningful level today. Secondly, tactical allocation, clearly marked opportunities are diverse, we have a broad opportunity set in terms of currency and a market exposure, as well as sectoral in stock. Managing exposure through the cycle is critically important and therefore, we do take active positions and do manage positions through the cycle.
Stock selection, again as you mentioned, there is large number of holdings and the way we deal with that is by using individual experts, individual internal and external managers to actually select underlying stocks, so my job really is to manage the overall mix, to manage the risk allocation on the product from a strategic perspective, from a tactical perspective, as well as ensuring that we've got the right underlying drivers in terms of stock selection alpha to add value through time.
Wall: Paul, thank you very much.
Niven: Thank you.
Wall: This is Emma Wall for Morningstar, Thank you for watching.
