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Foreign affairs

Progress is being made in revamping the Foreign & Colonial investment trust.

Industry experts generally applaud the steps being taken but many believe more work is needed to turn round its fortunes significantly.

Last week, the trust published its interim results for the six-month period to June 30. They showed the portfolio has delivered a total return on its net asset value of 9.1 per cent, the interim dividend was up by15.8 per cent and there is an expected annual dividend increase of at least 10 per cent.

In addition, the new managers for the North American and Japan portions of the portfolio were revealed.

Independent specialist multi-manager Investment Management and Selection will look after the North American portfolio, valued at 462m, apart from the smaller company portfolio. On IMS’s advice, F&C has selected four managers – Barrow Hanley, GMO, Gartmore and Loomis Sayles.

For the Japanese portfolio, valued at 120m on July 26, Goldman Sachs Asset Management has been confir- med as the new manager.

In May, F&C created a bespoke US smaller company portfolio for FCIT by means of an in specie transfer of 37m from an F&C fund.

When the trust’s annual results were announced in February, the board decided to take decisive action by outsourcing some of the investment trust in a bid to boost performance. At the time, chairman Mark Loveday described the relative NAV total return performance in 2004 as “disappointing against the objective set” and cited a continuation of poor stock selection in certain regions as a driver of this.

He noted that the Europe ex-UK section was particularly disappointing relative to its index and that both the North American and Japanese portfolios disappointed.

But Loveday is notably more bullish over the six-month results and is confident the changes will lead to improved stock selection and better overall returns for shareholders.

Looking to the period under review, he noted that asset allocation was “positive as emerging markets and developed Asian markets performed very well”. Exposure to the US market was reduced and in the UK performance was “very strong”. But while stock selection improved in Europe and North America, it was behind the relevant indices in Japan, emerging markets and developed Asia.

Much like when Witan announced it was moving to a best of breed strategy, the structural changes at FCIT have been generally welcomed but there have been questions over whe- ther the changes are sufficient.

The sector in which FCIT sits has typically endured a challenging time. As Iimia head of investment trusts Nick Greenwood quips: “Global generalists – if they didn’t exist, you wouldn’t invent them.”

Greenwood says when it comes to global generalists, their size is typically in stark contrast to investor demand (FCIT has 2.4bn of assets). But he concedes that FCIT is making steady progress and the move reflects the general ongoing changes within the investment trust universe — those of “accelerated evolution.”

He says: “Generalists have a very difficult job but FCIT is a good investment in terms of a generalist global equity vehicle.” But while Greenwood holds other global generalist Monks, he does not invest in FCIT.

Arbuthnot investment trust analyst Tom Tuite-Dalton believes the FCIT board is being proactive but does not see that “it is going to have any short-term impact on the trust’s discount”.

Apart from share buy-backs, FCIT has yet to create any formal discount control mechanism, something which was taken into account when Witan altered its structure, opting for a 10 per cent or less tactic. At July 28, FCIT’s discount stood at 16.6 per cent against a sector average of 14.2 per cent.

But Close Wins investment trust analyst Simon Elliott points out that FCIT has been using share buy-backs and has been quite rigorous on this: “So there is support.”

During the first six months of 2005, Loveday notes that FCTI repurchased and cancelled 28,978,869 shares, representing 3.2 per cent of the share capital, at a cost of 58,231,000. He says: “The average discount was 16 per cent and the transactions added 1.2 pence to net asset value per share.”

Ultimately, the board will be relying on performance. For Elliott’s part, he feels that F&C Asset Management does a reasonably good job. He says: “Performance is up recently but over the long term it has not blown the lights out. Also, any amounts of outperformance are going to be muted, given the number of holdings it has.”

Tuite-Dalton says it would make more sense if FCIT took action, like Witan did, to get the discount to around 10 per cent. He says: “A lot of investors these days now want that comfort mechanism of a discount control but, having said that, there are going to be other types of investors, those saving for retirement and so on, and it makes sense for them to buy at a wide discount.”

Best Invest investment trust analyst Simon Moore believes the action being taken has to be a good thing and, with FCIT’s size, is a considerable undertaking. At the same time, he says not one his clients is rushing out to buy it right now.

He feels the appointment of a chief executive, like Witan choose to do, would have been welcomed.

Overall, Greenwood believes that discount mechanisms will become more common in future. He says: “FCIT has steadily been buying back shares. If you bring in a discount mechanism, the fund will start to shrink and that is not good news from a commercial point of view.”


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