Fairly Valued Markets are a Challenge for Investors

Foreign and Colonial manager Paul Niven is taking a global approach and reducing gearing in order to create value in a challenging investment environment

Emma Wall 16 September, 2014 | 9:29AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall, and here with me today is Paul Niven, Manager of the Foreign & Colonial Investment Trust (FRCL).

Hello, Paul.

Paul Niven: Hello, Emma.

Wall: So, you've recently taken over the Foreign & Colonial Investment Trust, and one of the decisions that you are making is to reduce domestic exposure. Why is that?

Niven: Well, a decision was made to make the Trust more global in nature and around 18 months ago, the Trust adds 35% in U.K. equities. We progressively reduced that, entering 20% at the beginning of 2014, and during the first quarter we actually cut that further to around 10% exposure.

It really relates to the opportunity set. The U.K. market, as you know, is relatively concentrated in nature, and it’s our view that its investors benefit to take much more global approach in terms of how they approach accessing opportunities.

Wall: I mean it’s one of the things that U.K. investors are often guilty of, is having a domestic bias. But as well as that sort of emotional play, the U.K. has done very well over the last couple of years, equally so have other developed markets like the U.S. and Europe. Will you be trimming there as well or is it much more about being more globally balanced?

Niven: We're certainly more globally balanced, notwithstanding the fact that actually our U.S. exposure has offset naturally as we become more global and that's where clearly many of the largest companies reside and we have increased exposure more generally, so we allocated exposure to Europe.

An interesting point is, emerging markets, which now on a full exposure basis are broadly equivalent in terms of our U.K. allocation. We are actively considering that area and determining whether actually to raise that exposure further.

Wall: How are you going to balance that with sort of business as usual for existing investors because, of course, they have been used to the Trust being run in a certain way under Jeremy Tigue and indeed for longer than that and a certain kind of dividend and performance. Now, it sounds like you are changing strategy quite a lot. Is this to facilitate business as usual or will investors see a change?

Niven: Well, I think the key point is that the changes which are taking place and will take place are evolutionary in nature. The objective of the Trust is long-term growth in capital and income and that is what has been achieved through time. So the changes which are have been made and will be made are entirely consistent with that.

As far as the end investor is concerned and shareholder is concerned, there won’t be any change in terms of that objective. Really it reflects, again, where we see the opportunities going forward being much more overseas rather than constrain yourself to the domestic market.

Wall: Where are the concerns then for you? Because you've mentioned where the opportunities are that is taking a more global approach. But what are you concerned about as a fund manager?

Niven: Well, I think we have to recognise the markets have moved a long way, and we move from a point really of significant undervaluation in risk assets globally, that’s equities and credit, and very depressed earnings levels and dividend levels five years ago to a point now whereby that value gap has really gone and markets now we're trading are fair value at best and in many instances, fully slightly rich against fundamentals.

Earnings have in some instances gone through previous peaks, but in other instances such as Europe, actually they are some way below. So I think as always there are a number of concerns, one of which is just how far markets have run. I think a lot of that actually reflects a re-pricing of risk. But really for markets to make substantial progress from here, we need to see fundamental improvement.

There is a reason why policy has been so loose and that is the underlying economic environment is very tepid and we need to be concerned about the very narrow path which we’re treading today essentially between the outlook for interest rates and the outlook for growth.

Too much growth and that may unsettle equity markets with interest rate rises, and too little as we see concerns in Europe clearly today, that may lead to a deflationary return, which is similarly bad for equity markets. So as those things are to be worried about, there are also lots of opportunities.

Wall: You've mentioned that predominantly equity markets, but you did say credit in that. So, where are you positioned in terms of fixed income? What’s your opinion about it?

Niven: Well, we don’t have direct credit exposure. We do borrow, however. So we do use bank facilities in order to finance investments. My view in credit and on fixed income markets, in general, is that their value is somewhat lacking there. That’s a good environment to borrow. But as I said earlier, the asset prices, which we’re actually paying on into the investment have moved a substantial way already. So we’ve actually been reducing gearing again from earning 15% 18 months ago down to the level of 7% to 8% today.

We look at currency in terms of borrowing from multi-currency perspective. So, again, there are lots of opportunities. We’ve borrowed in yen, which was a very good decision which was made given the depreciation in the currency and that helps in terms enhancing returns for investors. Not just by levering up returns, but by using borrowing in a smart way and taking advantage of economic trends and across different markets beyond U.K. again.

Wall: Paul, thank you very much.

Niven: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
F&C Investment Trust Ord1,014.00 GBX0.00Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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