Holly Cook: Morningstar analysts rate well over 1,000 funds and I'm joined today by Jackie Beard, Director of Closed-End Fund Research, to look at one specific rating.
Jackie, thanks very much for joining me.
Jackie Beard: Hi, Holly.
Cook: So you've rated F&C Capital & Income (FCI) ‘Neutral’. Does that indicate that you've got concerns about the fund?
Beard: Well, at this fund there are things we like and there are things that we don't like. So, first of all, when we look at the manager, Julian Cane, we have quite a high opinion of him, probably because he's been there since 1997--that's quite a long tenure and that kind of stability is very rare to see these days. His background is very much corporate equity, very much in the UK. So he is well suited to the mandate.
However, when F&C was up for sale in the mid-2000s, they did quite a lot of cost cutting and saw all their career analysts leave the firm. So, the managers now have to do both sides. They have to do all the analytical work and run their funds. And it’s still quite a small team and we just think it's probably constraining their resources a little bit.
Cook: And has that actually affected the overall performance of the fund?
Beard: Well, to be fair, from Julian's first start until now he has outperformed his peers by a little bit, but when you break it down a bit more and look at the last seven years or so, he has under-performed in five out of those seven years.
Now it's important to split the performance into two because income is a big part of this fund. The board is very insistent that they have a very firm commitment to increase that dividend year-on-year and they have met that. So, for people holding this fund because of the income then their needs have been met, which is very important. The problem is the capital gains have struggled, so it seems to have come at a bit of a price.
Cook: And you mentioned price, and investment trust tend to be cheaper, don't they? So what do you think of the price here?
Beard: They do and this fund does have a competitive advantage but unfortunately that still doesn’t seem to have translated into strong long-term outperformance.
Cook: And the discount, what do you think of that?
Beard: The discount is being very well managed. The board are very clear on their guidance and they don't like it going too wide and, equally, they don't like a premium going too high. So when it has gone to a discount, they’ve bought back shares and managed to keep it in, and when it’s gone to a premium, they have also issued shares into the market because they are very keen not to disadvantage current shareholders. And I think they've done a pretty good job, yeah.
Cook: So you’d consider that good execution on the part of the board?
Beard: Yes, we would. However, we have another concern at the board, in the sense that of the six members there—a bit top heavy [for a] £200 million fund, but there is some succession planning there because a couple have been there for quite a long time so we probably expect that number to come down—only three of them are shareholders.
Now, there is no academic evidence that proves it's a good thing for them to hold shares, but when you have a chairman who is not a shareholder, and his predecessor who wasn't a shareholder, and the current chairman is sitting on the boards of other listed companies and is holding shares [there], and you’ve got two other boards members not [holding shares in this trust]…I just think it's a bit disappointing really.
Cook: So, overall, is it fair to say that this is a ‘no harm fund’, but perhaps there are better options out there?
Beard: Yeah, absolutely. I think for people who need income then it’s met that criteria and that's not to be underestimated, but in terms of the overall package, I think there are more competitive funds out there that have delivered better long-term returns.
Cook: Well, thanks very much for joining me today, Jackie.
Beard: Thanks.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
