F&C: three UK shares that make our global portfolio

F&C Investment Trust Ord (LSE:FCIT) manager Paul Niven sits down with ii’s Sam Benstead to discuss how he manages his global portfolio.

He explains his 9% allocation to the UK, including three London-listed shares that he likes, but makes the point that there are more exciting geographies out there.

Niven also reveals whether he has “skin in the game”, and talks about his allocation to private shares.

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Paul Niven, manager of the F&C Investment Trust. Paul, thank you very much for coming into the studio.

Paul Niven, manager of F&C Investment Trust: Nice to see you.

Sam Benstead: F&C is often seen as a one-stop shop for global equities. Can you explain your approach to stock picking and how you build this portfolio for customers?

Paul Niven: Sure. So, my role is not as a stock picker. My role is essentially to structure the overall portfolio in a manner that's consistent with our performance objectives.

The way that I do that is by selecting from strategies within Columbia Threadneedle Investments, the manager of the trust, and from managers from across the market.

We invest in listed equity and private equity, and within the listed equity component we invest in different global strategies and different regional strategies.

So, for example, in the US, we have two value managers. One component run by Columbia Threadneedle Investments, one a Dallas-based manager called Barrow Hanley, who focus on value investing.

We also have the US large-cap growth portfolio managed by JP Morgan out of New York. So, blending together those different strategies with different styles enables us to diversify exposure, adding returns, reducing risk, providing, hopefully, a smoother performance outcome for shareholders.

We take a similar approach in private equity where we have private equity resource and expertise within Columbia Threadneedle Investments. We use them to source and select fund investments, but also individual co-investments, which are individual company investments, albeit in the private market. And we supplement that with third-party exposure through various areas, but notably with Pantheon running a bespoke programme where they source and select leading growth and venture managers for us as part of the portfolio.

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Sam Benstead: And what do you look for when partnering with a third-party fund manager? Are there any special questions you ask or red flags or green flags that actually might help listeners at home pick their own funds?

Paul Niven: Sure. So, I think the general approach is that there's more than one way to win in terms of delivering returns in equities.

What I mean by that is essentially through the market cycle, you will see different characteristics of stocks performing at different times.

So, for example, more lowly valued value stocks, cheap stocks, will perform perhaps better in a rising interest-rate environment when inflation is also rising.

Growth stocks, which have got high momentum may well perform in a declining interest-rate environment. High-quality companies, which have strong moats and dominant market positions, do tend to outperform in the long run.

So value, momentum, quality, putting aside size, are all characteristics, which, in the long run, can prove to be winning strategies for investors. You see many asset management organisations that brand themselves, or position themselves, around one of those aspects, or one of those ways of investing. They could be a quality investor, a growth or momentum investor, or a value investor, and they'll look for companies with attributes which align to their philosophical beliefs.

So, we put strategies internally which align to those types of characteristics. So, albeit Columbia Threadneedle, typically, is more of a quality-growth house in terms of the way that we invest. And externally, clearly we can source and select from across the market.

And specifically on your question, we'll look for managers that have got a clearly articulated, repeatable, robust investment process where we have confidence in terms of not only understanding why and how returns have been delivered, but there is a persistency and consistency that should give rise to a positive outcome in the future as well.

Sam Benstead: And this leads you to nearly 450 companies, that sounds like a lot. So, is that too many for a global equity portfolio?

Paul Niven: That 450 does include our private market exposure as well. You just take the listed market exposure, then the number is less than 400. And, actually, that number is coming down.

I think there's a balance to be struck between concentration and diversification, and there is no right number in terms of what the right number of stocks is.

The way that we approach investment, however, is by giving managers a mandate to pick a relatively concentrated number of stocks, which align to their way of investing. So, to my earlier example, our value manager will be picking 40 stocks roughly in the US value space, our European manager will be picking 30 or 40 stocks in the European space. Our emerging market manager [is] in 40 stocks.

When you add that together, you do get to several hundred stocks in the portfolio. The principle being that each of those individual strategies is designed to deliver a specific outcome against a specific yardstick, whether it's a geographic yardstick like the emerging market index, or a stylistic benchmark like a growth benchmark or a value benchmark.

And when you bring them together, again you can add returns and reduce risk by diversifying across those different sources of return. But it's a balance, I think it's fair to say, in terms of having sufficient number of strategies and stocks to diversify, while remaining sufficiently different [to] the index to essentially justify our position as an actively managed fund.

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Sam Benstead: You have about 9% in the UK. That's more than double the global equity index. So, why is that? And can you give some examples of UK shares that you like?

Paul Niven: Well, that 9% does include the private market exposure. If you strip out private markets and just look at the global equity component and how much is in the UK, I think around 3.5% to 3.6% of the global equity benchmark is UK.

We're a bit above that, we're 5% to 5.5% in the UK. So, not quite 9%. I actually don't have a strong view that the UK is a great place to invest, unfortunately right now, from an equity perspective.

I do believe that the market looks cheap optically on any kind of historic metric and certainly that is the view of many of the managers we employ to select stocks on the trust.

And the reason we have that slight overweight position to UK equities, really is a function of the underlying stock pickers rather than me making a big top-down call.

I think for the UK market specifically, commodity prices are very important in terms of performance outcome and also the level of sterling is quite important in terms of the UK market outcome given the proportion of earnings, which are actually derived from overseas in terms of UK companies deriving earnings from non-UK sources.

And, on balance, I think there's a case to be made that maybe if sterling rises a little bit further from current levels, commodity prices, despite all the concerns related to the Middle East, are relatively soft, with the exception of gold. Oil's relatively soft. So, I think those two aspects are a bit of a headwind for UK equities.

The UK equity market has been clearly an area that has looked cheap for a long time, but has unfortunately disappointed in terms of the earnings growth outlook and delivery of earnings from that area. But our managers see some good opportunities.

For example, NatWest Group (LSE:NWG) is a company that our pan-European equity manager holds. They view that as very attractively valued. High return on equity. Maybe the lower interest-rate cycle is going to help profits there.

We've just bought, or that manager's just bought, Taylor Wimpey (LSE:TW.) in the UK as well, a well-known housebuilder, very strong land bank. We may have some reforms coming through that might push through more by way of housebuilding in the UK.

So, there's some examples like that, plus Compass Group (LSE:CPG) as well, which has consolidated its position as a leading provider of outsourced catering solutions post-pandemic.

So, there's numerous stock-specific examples. Top down, the UK, unfortunately, I still find relatively unexciting compared to some of the prospects we see elsewhere.

Sam Benstead: Private equity is one of the areas that really does distinguish you from the index. So, how much is invested in private assets, and why do you like them so much?

Paul Niven: We have around 10% of the overall asset exposure in private equity right now. And as a closed-ended fund, we are not dealing with inflows and outflows, so we have, notwithstanding buybacks, permanent capital.

We can take a long-term view and that's advantageous in terms of investment perspective that we can take. And that is one reason why we do choose to allocate capital to private equity.

We've got a very long experience investing in private markets. Our experience in general terms has been good. What I mean by that is that we have delivered, typically, an excess return on that private over public exposure.

The last few years have been more challenging for private equity returns. We see opportunities in the private market space with small, very fast-growing companies that we do not necessarily find in the public space. So, it offers something slightly different.

And there are numerous examples of strong performance outturns that we've enjoyed from private market exposures. Earlier this year, we realised an exposure in Jollyes, which is a pet supply retailer, which many people will be familiar with. We made a 3.7 times return on that investment since we committed in 2018.

So, there's some very good opportunities, we think, still in the private market space, albeit it's fair to say that valuations have been relatively stagnant in the last couple of years. That's been a little bit of a drag to our returns, but longer term, we think there remain good opportunities.

And that programme that we have with Pantheon, again, we're in very early with leading growth and venture managers where there is a relative persistence of return, and we expect in a multi-year view that that will again be accretive to our returns for shareholders.

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Sam Benstead: The trust trades on a -9% discount. So, why is that? Is that linked to the private assets and scepticism over the valuations and therefore the net asset value of your portfolio?

Paul Niven: It's a really good question and, again, a very difficult question to answer precisely why we are trading at a roughly -9% discount as we speak today.

If I reflect back, in Q1 2023, we were actually trading at a premium, albeit briefly. So, it wasn't that long ago we were trading at a premium at a time when I think the private equity sector was at a relatively wide discount.

So, I think one can make an argument that perhaps some scepticism with respect to unlisted valuations could be part of the reason for the discount.

We have seen a general widening in discounts across the whole investment trust sector. Unfortunately, it might be that people are somewhat concerned about potential tax changes and want to crystallise gains that is leading to some net selling.

We know the cost-disclosure issue is not affecting us directly, I don't think, but have had a broader impact in terms of the sector.

But the reality is that we are trading wider than where we would like to be, and certainly wider than we have been in recent years. My view is that given the performance that we've delivered, the discount does look somewhat anomalous.

Sam Benstead: And are there any policies in place to actually try and narrow that discount?

Paul Niven: There are. So, we have consistently used and applied buybacks essentially to take excess supply out of the market.

To give you a sense about the scale of buybacks that we've undertaken, last year in 2023, we bought back 8.6 million shares. This year, as we speak, we bought back in excess of 21 million shares. So, we're obviously just past the third quarter, but we've bought back more than twice as many shares as we did in the whole of 2023. So, the level of buybacks has stepped up and we're currently trading around £10.50.

So, that's more than £200 million that's been used to buy back shares, which is relatively substantial for us as a £5.1 billion listed company. So, that deals with the supply side of things that is, I think, helpful in terms of managing the supply/demand imbalance, which leads to the discount.

On the demand side of things, we are certainly actively marketing the trust. We do believe the investment proposition is strong. We do think we're very well placed to meet the needs of retail investors and therefore there is a very active marketing programme that we hope to create incremental demand from.

Sam Benstead: Finally, the question we ask all our guests, do you personally invest in your trust?

Paul Niven: I do invest in F&C Investment Trust. I believe in the investment proposition that we offer for retail shareholders. I think it's important for managers to commit their own capital to the investment trust that they manage.

Sam Benstead: Paul, that's great to hear. Thanks very much for coming into the studio.

Paul Niven: Thank you.

Sam Benstead:  And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment and subscribe. See you next time.