Technology-focused investment trusts have nowhere to hide amid the shift away from expensive growth stocks — just look at the nosedive in returns from Scottish Mortgage, a former stock market darling. For F&C Investment Trust, however, market volatility is when a non-partisan approach proves its worth.
The FTSE 250 constituent invests across global stock markets as well as in private equity, with strategies ranging from sustainability to emerging markets to North American technology companies. The trust has a solid record of delivering high compound returns over the longer term. Over the past ten years the shares have generated a total return of 249 per cent, more than twice that of the FTSE All World Index. The trust has not escaped the recent market tumult and over the past 12 months the shares have delivered a total return of just under 1 per cent, according to Refinitiv, but that’s against a negative return of 15 per cent from the FTSE All World during the same period.
Compared with other investment trusts with a global remit, the trust’s resilience is significant. In fact, based upon the 17-strong global peer group compiled by the Association of Investment Companies, F&C’s shares have delivered the second highest total return over the past year.
The sell-off leaves the shares at a discount of almost 8 per cent against the trust’s net asset value. A discount is not entirely unjustified. The trust has about 13 per cent of assets invested in private companies, which gained 4.7 per cent over the first six months of the year and provided some cushion against declines in the asset value of its publicly listed equities. But the valuations attached to private market companies typically take longer to correct than those in the public arena, which means F&C’s private equity gains seem likely to be eroded or erased later in the year.
Big technology companies such as Microsoft, Alphabet and Apple are among the trust’s top five largest listed holdings, but since the latter half of 2020 Paul Niven, the F&C manager, has been pivoting the trust away from the sector, a call based on stretched stock valuations and the prospect that higher inflation would give way to interest rate rises. Consequently, the trust is also underweight in North American stocks, with 39.6 per cent of assets allocated to the region, below 61.8 per cent exposure by the benchmark.
In which direction has that cash been reinvested? Primarily global income and US large-cap value stocks, with value strategies accounting for 35 per cent of the trust’s assets. Exposure to more defensive healthcare stocks has increased, with UnitedHealthcare, the American healthcare and insurance company, becoming the third largest listed holding at the end of June, while CVS Health and Merck also moved into the top ten stock market holdings.
Some of the proceeds from equity sales were used to reduce gearing and to lift cash reserves, with the latter increasing by £300 million from only £52 million at the start of the year.
Last year the trust paid a dividend of 12.8p a share, which equates to a yield of 1.5 per cent at the present share price. That hardly puts the stock in income territory, but the dividend is a reliable one. If the cash return is raised this year, as the board intends, that would represent the 52nd consecutive year that a dividend increase has been declared. Like last year, a slither of this year’s dividend is likely to be funded by revenue reserves, but those reserves equated to 15.5p per share at the end of June, which leaves enough room for a dividend increase. It all suggests that a low-maintenance F&C will continue to outperform over the longer term.
ADVICE Buy
WHY The trust has a good track record of outperforming against varying economic conditions
Anglo Pacific
Commodities companies sit in a grey area. Supply constraints have boosted the prices of raw materials, but a recession could cause demand to slump. Anglo Pacific has already been priced for a pull-back in metals prices, which leaves room for the shares to re-rate in the medium term.
The company, which invests in mining royalties and revenue streams, offers investors a way to gain exposure to underlying commodities prices without the risks of capital intensity and cost inflation associated with operating mining assets themselves. In the past decade it has shifted its exposure away from fossil fuels and towards base metals, chiefly copper and nickel, used in technologies such as producing electric vehicle batteries.
By 2026, Anglo Pacific aims to have ended its exposure to coalmines by recycling income produced by the Kestrel mine in Australia into other assets. This month it paid $185 million for royalties over development-stage copper and nickel projects from South32, the miner, to replace the income lost from Kestrel.
In the first quarter, bumper coking coal and cobalt prices pushed royalty income up to a record $43.6 million, from $9.4 million a year earlier, but that pace of growth is not expected to continue. Peel Hunt, the house broker, has forecast a rise in pre-tax profits of more than 70 per cent this year to $93.6 million, before a fall to $29.5 million next year.
Nevertheless, the stock looks cheap, even if the windfall profits of last year and this year are unlikely to be sustained. The shares trade at eight times forecast earnings for next year, below a decade average multiple of just under twelve.
Anglo has little view of future revenue, given that royalties are paid monthly or quarterly. Beyond fluctuations in commodities prices, investing mostly in mines in production helps to reduce risk. Those account for 66 per cent of assets by book value, with a further 30 per cent of mines being between two and five years away from production. It is highly cash-generative, meaning a good dividend. Peel Hunt’s forecasts for next year suggest seven cents a share, more than twice covered by earnings.
ADVICE Buy
WHY The shares are priced attractively and offer a generous dividend
