In the run-up to F&C’s 150th anniversary, manager Paul Niven explains why he prioritises asset allocation over stockpicking.
The savvy are well-aware of mines lurking in the harbour. One day, perhaps soon, the concern is that one or more will detonate, shattering the easy pickings that have benefited investors these past few years – a truly golden era for those with money on the table.
Copious and unprecedented amounts of global cheap money have inflated asset balloons in pretty much everything from beach huts to bonds, and equity valuations, by any yardstick, are now touching the sky. Leading firms in securities management are increasingly warning of the inevitable correction – possibly savage – but the consensus is that the show will go on for a while yet. (This article was written and appeared in print before the market declines of 5 February)
This is also the view of Paul Niven, manager of Foreign & Colonial (F&C), the first-ever investment trust on the block. He does not expect a global recession, even if there is a marked downturn in financial markets, and readily finds reasons to be to be cheerful.
This year marks F&C’s 150th anniversary: £100 invested on day one would now be worth more than £10.8 million; in comparison, that amount in a building society would be worth £256,961. These figures reinforce the case for long-term equity investment.
F&C is pretty much exclusively held by private investors – some 100,000 of them. With a market capitalisation of £3.7 billion, it is one of the largest trusts in the realm, despite some 50 per cent of share capital having been bought back since 2005. The share price discount to net asset value has halved to around 5 per cent in the past three years and Niven now envisages a time when the shares might fetch a small premium. This would allow him to issue new shares.
‘We have delivered good performance,’ he says, talking of a ‘strong performance pedigree’. But against its peers in the global investment trust sector, performance figures place F&C in the second quartile over both one and three years, outcomes that would normally hinder the prospect of increasing the capital base.
Niven, 44, has been F&C’s manager since 2014, and is only the third since 1969. He stresses that he is no stockpicker, unlike his feted penultimate predecessor, the late Michael Hart, a man whose fan club included Warren Buffett. Niven’s role is to set the trust’s asset allocation and he imposed his will from day one. The UK element of the portfolio was hacked back: it was previously 20 per cent of assets and now, loaded with FTSE 100 companies, it hovers around 6 per cent. Also, the benchmark was changed to the FTSE All World index, instead of a global/UK split.
Niven presented his case for a more global remit to the trust’s board before taking control, and is now patting himself on the back. ‘It was a good decision. The UK market has been a laggard, partly because of the depreciation of sterling. But markets overseas have outperformed.’
Niven’s seemingly scattergun approach is probably one for the record books. F&C owns more than 500 companies spread over some 35 countries, an astonishing number. Exotic locations include Peru, Vietnam and Egypt. Why so many? ‘The objective is to deliver a one-stop solution for a global growth portfolio,’ he says.
Niven thus operates as something of a ringmaster, as the responsibility for all stockpicking is delegated. Not all managers are at arm's length, however, as roughly half F&C’s assets are managed by specialists in other divisions of BMO, the Bank of Montreal asset management offshoot that also includes F&C Asset Management.
Some might question whether this is best practice. Witan, one of F&C’s heavyweight peers, has long deemed that global equities are not best managed from London, and outside parties took its baton some years ago.
Niven says any change to F&C’s present set-up would be a board decision. ‘It is cheaper to do it in-house,’ he says. On his relationship with these various specialist managers, Niven says: ‘The ringmaster doesn’t just crack the whip. I engage with them.’
Half in the US
Almost half of F&C’s assets are invested in the US, managed mostly by two firms. One, T. Rowe Price, has a higher-risk growth brief. It owns predictable names, such as Amazon, Alibaba (US-listed) and Facebook. ‘We see a lot of upside with Amazon but we are beginning to trim our position a little,’ Niven says. He adds: ‘T. Rowe Price has about one-quarter of the portfolio, and has consistently been a top-decile performer.’
The ‘value’ portion of the US assets, managed by Dallas-based Barrow Hanley Mewhinney & Strauss, has some 45 stocks that account for the balance of US exposure.
‘These strategies – value and high-risk growth – complement each other,’ he says. ‘I’m not just betting on red or black. My role is to look at opportunities to deliver different approaches (such as growth and value) and blend them together.’
Niven implies the 500-plus stock portfolio is not a ‘safety in numbers’ approach. ‘All portfolios are focused. The UK manager has 29 stocks, the European manager has 40 stocks.’ This tight, focused slant is uniform across all geographical regions.
Japan might be the world’s third-largest stock market and for many investors it offers better prospects than Wall Street, but Niven has just 10 per cent of F&C’s equity assets invested there. ‘It was five per cent 10 years ago, and whether 10 per cent is enough right now is a debate you can have all day.'
F&C’s top 10 fund holdings include several private equity interests. Aside from US equities, private equity funds make up the remaining money managed outside BMO.
Beyond, what other changes in the asset mix are pencilled in for the next year or two? ‘North America will still be the largest exposure and we’ll probably have more in emerging markets. The money will come from developed markets; all of these will lose a bit of money to emerging markets,’ Niven says.
Right now, he points out, there are ‘any number of geographical, political risks,’ but he thinks the next year at least will be positive for financial assets. The US growth cycle will extend to the longest on record, he predicts. ‘The inflation outlook has been persistently undershooting expectations and will remain low.’
The outlook for US equities, he believes, will be enhanced by modest interest rate rises and earnings upgrades. But, before too long, ‘our capital will look beyond the US and better opportunities will be found in emerging markets.’
China is now only a small part of the trust. At present China has share classes for domestic and foreign investors, but Niven predicts equity markets will ‘be opened up’. Echoing many, he cites corruption and poor corporate governance as the reasons to back away from the country, but this stand-off is not set in stone.
Niven adds: ‘The corporate sector is becoming increasingly concentrated,’ and points out that these enterprises are getting a growing amount of available revenues.
He cites Amazon and Facebook as examples of this in the technology arena. The financial sector has also become much more concentrated than, say, 20 years ago, and competition has also diminished in other sectors. Today, ‘the corporates have got more power.’
Niven accepts there is a risk of a backlash against these power groupings; ‘but what to do about it? Anti-trust legislation is much less of a force than it was 30 years ago.’
As in any business, Niven keeps a close eye on the competition, so which rival does he admire most? ‘Do I have to answer that?’ Surely Scottish Mortgage, the £6.7 billion global trust whose performance, reflecting its huge bets on internet and other technologies, has been astonishing?
‘Scottish Mortgage has done a fabulous job,’ he retorts. But, he stresses, the trust has a narrow focus. ‘Technology has been a good opportunity for Scottish Mortgage but it is not the only strategy.’