Face-off: Foreign & Colonial versus Monks
The Association of Investment Companies global sector is increasingly a fertile hunting ground for investors. Previously a sleepy backwater, it has been galvanised by competition, investor demand and, in some cases, activist investors.
Both are behemoths in the sector - long-established and huge. The F&C trust is £2.8 billion in size and has been running since 1868, while Monks is £1.1 billion and was launched in 1929.
For F&C, Paul Niven took over from longstanding manager Jeremy Tigue in June 2014. Performance had been fine, if unexciting, but Niven got to work, paring back the UK exposure of the trust and reinvesting it in Europe, the US and Japan. The aim was to make it a truly global portfolio.
POSITIVE MANAGEMENT CHANGES
For Monks, Charles Plowden took over from equally longstanding manager Gerald Smith in March 2015. Smith had been manager of Monks since 2006, but his defensive stance after the financial crisis had led to some poor performance and a review from the board.
Plowden had a strong record with his 'global alpha' process and seemed a natural choice, helping Baillie Gifford hang on to the trust's management.
In both cases, the adjustment is largely complete. Plowden says: 'We are 99 per cent through the process. We have a tail of illiquid or unquoted companies that we would love to get out of the portfolio, but we don't want to force the pace.'
He says most of the trading was done in the first three weeks following the handover. This means that both trust managers can reasonably claim the past 18 months of performance as their own.
Both have seen an improvement in performance since the change. For Niven, the move away from the UK was serendipitous at a time when UK markets were held back by the Brexit referendum.
For Monks, Plowden's focus on structural growth companies has put him in the sweet-spot of the market. Over one year, the Monks share price has risen 32 per cent, against an average return for the sector of 20.4 per cent.
The F&C trust has managed a slightly more pedestrian 21 per cent, but the net asset value (NAV) return was higher at 27 per cent.
Alan Brierley, director of the investment companies team at stockbroker Canaccord Genuity, has been positive on both changes.
He says of F&C: 'The company has continued to build an impressive performance record; over five years, it is ranked fifth out of 38 global investment companies and is comfortably in the top quartile of an extended peer group including global open-ended funds.
'We believe that the company is well-placed to build on these solid foundations and we retain our buy recommendation.'
On Monks, he says: 'We are encouraged by the strong recovery in performance after what had been a difficult period for the company. Providing this improvement can be sustained, we would expect to see a further narrowing of the discount in the months ahead.'
But such strong endorsements for both trusts don't necessarily help investors pick one over the other. So, which one wins?
Charles Plowden is a Baillie Gifford 'lifer', having joined from Oxford University in 1983. As such, he is well-versed in the Baillie Gifford process, and to a large extent, Monks is a reflection of that - drawing ideas from across the firm, while Plowden and his team distil them into a concentrated portfolio.
The trust can invest anywhere in the world, though in practice almost half is in the US. Plowden picks his holdings entirely based on company performance - no macroeconomic analysis, or geographic asset allocation influenced the make-up of the portfolio.
The team (which comprises Plowden, Spencer Adair and Malcolm MacColl) makes scant reference to the benchmark, with an active share of 93 per cent, meaning there is only a 7 per cent stock overlap with its FTSE World index benchmark.
This is firmly a growth fund. It pays an income of just 0.3 per cent. Plowden says: 'We believe that growth is what creates value over time. We want to see the potential to double our money in a particular stock over five years.
'We aim to buy when the growth is under-appreciated and then hold onto the companies for the long term. We have a very low turnover - around 20 per cent.'
With lower economic growth across the globe, Plowden finds that his ideas are coming from a narrower range of sectors, but that when he finds them, they are growing much faster.
He says: 'A lot of our portfolio is backing the opportunities presented by new technology. These businesses are not capital intensive. Amazon can grow and its suppliers fund its growth, while it simply needs to build warehouses.
'In this way, it is easier to find companies that can growth at 25 per cent, [a year] today than it was when companies had to build factories and hire lots of people.
'Facebook is a huge global company, but has few assets and few people. As such it can be easier for companies to grow, but they are in narrower areas.' That said, he makes sure he is well-diversified across growth drivers.
Plowden and his team developed the process in 2005. 'We see ourselves as a product of the whole firm. In every regional team, we have a "scout" for global alpha.'
The trust is a higher-octane version of the open-ended fund, Baillie Gifford Global Alpha. Plowden says: 'The fees on Monks are lower, which means it should do better over time. Also, we have modest gearing, so that should enhance returns over time.
'The trust also invests in slightly less liquid companies: 90 per cent of Monks is exactly the same as the open-ended fund, but 10 per cent is in less liquid companies of £2 billion or less where we find something particularly interesting.'
The eclectic nature of the trust is shown in two of its major holdings: the team has been a major investor in Amazon since the start.
He says: 'Jeff Bezos [its founder] has reinvested all the economies of scale to lower the cost to customers. It is impossible to compete. It brings all the convenience and price to consumers and we love that long-term vision.'
At the same time, new holding Wabtec is involved in the grimier business of making sliding doors and controls for passenger and freight trains, but is a significant beneficiary of infrastructure development in emerging markets. The team took advantage of a recent slide in the share price to invest.
FOREIGN & COLONIAL
Foreign & Colonial takes a 'multi-manager lite' approach. Around half of the underlying portfolio is run by BMO's range of investment managers. These include BMO-owned Lloyd George Management and fund of funds specialists Robert Burdett and Gary Potter.
European manager David Moss also takes a chunk of the assets, while T Rowe Price and Barrow Hanley manage some of the US exposure. Paul Niven, BMO's head of multi-asset investment, manages the trust's overall exposure to different strategies as well as asset allocation and gearing levels.
The trust's private equity exposure - historically around 10 per cent of the portfolio - has been a differentiating factor and has contributed positively to returns. The largest chunk is run by private equity specialist HarbourVest.
Brierley says: 'This part of the portfolio has aged well, generating strong returns and cash flow in recent years, and the maturity profile bodes well.'
On the trust itself, Niven says: 'We want to get growth in capital and income. Since taking over the trust, we've changed the benchmark to be much more global.
'The bias was to invest in UK equities, but we've moved down from 40 per cent to 10 per cent. In terms of underlying investments, we aim to invest in more focused portfolios.'
A significant differentiator for F&C is income. The trust has a yield of almost 2 per cent and Niven looks to grow this income over time. The trust has had 45 years of consecutive rising dividends. It also has income reserves, which it has used to pay out a higher dividend in weaker years.
Niven has also restructured the gearing since taking over, aiming to take on some long-term debt while rates are low.
Niven describes the trust as conservatively managed. It has lots of flexibility in terms of the geographic mix, but it doesn't tend to shift the asset allocation aggressively.
'There has been a lot of change in the last three years - we've added to US equities, up to 45 per cent of overall exposure and we've added to Japan and Europe.
'We've raised emerging markets as well for the first time in many years. Earnings growth has begun to moderate and the environment is less positive for equity markets, but there is a growth differential in emerging markets.' However, these switches are unlikely to be the norm in future.
There is barely a whisker between these trusts, and much will depend on whether investors like the dividend on the F&C trust and/or the multi-manager approach.
Both trade on a similar discount to NAV - around 10 per cent - and there's little to choose between them on charges. It's too close to call.