New Foreign & Colonial IT manager Paul Niven aims to boost exposure to emerging markets and cut holdings in underlying funds, writes Beth Brearley
F&C’s Paul Niven is looking to take the Foreign & Colonial investment trust’s allocation to emerging markets higher than its UK exposure for the first time in the trust’s 144-year history.
Niven, F&C’s head of multi-asset investment and recently-appointed manager of the trust, says emerging markets are trading at a material discount to developed markets with the largest spread since 2009. However, he has been hesitant to increase the trust’s exposure to emerging markets while consumer stocks in the sector look expensive.
“Emerging markets are, on the face of it, offering an attractive entry point, but we need to think about what we are buying,” he says. “The price to earnings ratio may be low because of emerging markets’ high exposure to cheap areas. Do we want exposure to cheap areas? The emerging markets story is about the domestic growth premium, but consumer stocks are trading at rich multiples.”
While emerging markets look attractive against markets such as the US, Niven wants to see better value levels, stability in emerging market currencies and further signs of an upturn in global growth.
Within the trust’s listed equity exposure (a chunk of the portfolio is invested in private equity) there is a 13 per cent allocation to UK equities and 12 per cent held in emerging markets.
“In March we had 25 per cent in UK equities, but we have cut this, while emerging markets exposure has risen 1.5 per cent over time. It could be the first time the emerging markets exposure is more than the UK.”
Niven took on the £2.7bn trust in July after veteran manager Jeremy Tigue stepped down. The process and investment objective have remained the same: Niven’s role is strategic asset allocation. He does not do the stockpicking, but uses internal and external managers. The trust’s aim is to provide long-term capital growth and income.
Changes were made to the trust during the handover, such as the cut to UK equities, which Niven says was to take advantage of a broader opportunity set globally, and allocating money to European equities.
The current weighting to Europe ex UK is 13 per cent, which Niven is looking to increase further “when the time is right”.
Gearing on the trust has modestly reduced recently, which Niven says is a function of rising asset prices. The trust has the capability to use gearing of up to 20 per cent, while the current level is 7 per cent, having gradually fallen from 15 per cent over three years.
The trust has a 25-year £110m debenture that has been paying an 11.25 per cent coupon. Taken out in 1989, it matures at the end of this year. While Niven is confident they can replace the borrowing at a lower funding cost than the debenture has been bearing, he is happy for gearing levels to drift lower until he addresses the more pressing decision of whether to invest further in private equity.
The trust has an 85 per cent allocation to listed equities and holds 15 per cent in private equity through Pantheon and HarbourVest. Commitments made to private equity in 2008 are now close to maturing, so if no decision is taken in the next 18 months the trust’s private equity exposure will likely fall to 10 per cent.
“Private equity has been a good investment decision historically,” says Niven. “Our private equity portfolio was delivering returns of 5.7 per cent year-to-date at the end of H1 against global equities 3.2 per cent, and this outperformance of listed markets continued in Q3. We have seen a J-curve effect as the portfolio has been enjoying good cash flow.”
Further changes in the pipeline include slashing the number of holdings in the underlying funds.
“Overall the number of holdings is currently in the high 500s and we are likely to take it below 500,” says Niven.