Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Paul Niven, Manager of the Foreign & Colonial Investment Trust (FRCL).
Hi, Paul.
Paul Niven: Hi, Emma.
Wall: So, firstly, happy birthday, not to you, but to the Trust, 150-years-old this year. Obviously, you haven't been running it over that tenure. But with a Trust with such history there must be lessons that have been learnt over the last century-and-a-half which are applicable now in today's market?
Niven: Absolutely. We've learnt many lessons over the last 150 years and we started out essentially as an emerging market bond fund investing into equities in the 1920s and really going wholesale into equities in the 1960s. So, I think, the most important lesson we've learned over the last 150 years is we need to move with the times.
So, that was a really significant move in the 1960s. But more recently, we took a really global approach and that meant reducing our exposure to UK equity markets five years ago from around a third of the portfolio to only 5% or 6% today. So, a diversified approach, which moves with the times, investing in opportunities in growth assets as we do today, we think, has been consistent certainly in recent decades.
Wall: Because investors and markets can be said are guilty of having quite short-term memories. I mean, we only need to look at the very recent volatility which came as such a shock to people because markets have been sanguine for sort of 18 months. At this particular point in the cycle where we are looking at that last stretch of the rally, what have you learned about previous market cycles that can be applied now?
Niven: So, our perspective in terms of the market cycle is clearly we're some way through the bull market and we're probably closer to the end than the beginning. I don't think that's probably contentious. In addition, the period of low volatility we expected which would not last.
Essentially, as the bull market matures, as rates rise, balance sheets of central banks begin to normalise, one would expect that actually credit spreads will begin to widen somewhat and the equity market volatility would return and obviously, that happened with a vengeance in February. We had waited quite some time, really many months of calm and an 8% drop in a very short space of time.
So, rising volatility, choppier markets, I think to be expected. But fundamentally, I think if one looks back through history, there are some warning signs that may precede prolonged market downturn. And frankly, we don't see those flashing red at present.
What I mean by that is, the yield curve, for example, is still upward sloping, not inverted yet. Growth expectation is still positive and valuations in markets are certainly not cheap but not to the level of excess we think that would precede a downturn on that basis alone.
Wall: So, you talked a bit about the similarities with the past and what you can learn through mapping the past. You know, the end of boom and bust didn't happen despite Gordon Brown's promise. What about the differences? I mean, I suppose the most obvious one is tech, right? I mean, things are very different now to how they were 150 years ago investment-wise?
Niven: Well, I think, that is actually a contentious point. Disruption is nothing new. The disruptors today, the likes of Amazon and Facebook, certainly are new companies and we were early investors in both of those companies. But over the last 150 years, there has been a trend of constant disruption.
You can think of Kodak, for example, which was an innovator in its day and then filed for bankruptcy not so long ago. So, disruptors can maintain a competitive position for some period of time, but they need to constantly look over their shoulder for the next technology which will in turn disrupt them.
But I think more specifically on technology and some of these large companies in which we invest, one of the relevant points really is market power. And one talks about quality, industry position. But many industries, whether it's internet search or social networking actually lend themselves towards monopolistic out-turns. And for investors, that's actually a good place to be, because those companies can command excess profits in due course. But obviously, there's a question mark for consumers.
So, technology disruption, not something new. We are weighted towards some of those disruptors and they do form part of our portfolio. But importantly, it's part of a diversified approach. So, our growth manager in the U.S. is focused very heavily on those kinds of companies, but we do also have a value approach which complements, we think, that exposure.
Wall: And finally, obviously, when the Trust was first launched it was a bond trust. But since you've moved into equities, is there any single holding which has been with you for that entire tenure?
Niven: So, we first made investments into equities in the 1920s and still more than 90 years on we still own Shell (RDSB). So, that was one of our first purchases, still in the portfolio today 90 years on. So, some people talk about long-termism, the importance of a long-term approach, but I think we can demonstrate that in terms of the way that we've approached investments over the last 150 years.
Wall: Paul, thank you very much.
Niven: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
