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Why now is the time to buy the Caledonia Investments trust

17 January 2013

The closed-ended fund is currently on a discount of 22 per cent but its significant outperformance since new management took over suggests this figure could soon narrow.

By Alex Paget,

Reporter, FE Trustnet

A change in management and subsequent uptick in performance means there may not be a better opportunity to buy the Caledonia Investments trust, according to Winterflood analyst Simon Elliott.

The £1bn trust has had a tough time of late and fallen out of favour with investors, causing its discount to widen significantly.

However Elliott is a fan of the trust and thinks that now is a good entry point for the long-term investor.

"We are very positive on Caledonia," Elliott said.

"There had certainly been an issue with the performance in the past, which is reflected in the share price, which is currently trading on a 22 per cent discount."

"However, I think that is very good value as there has been quite a significant turnaround in performance since the arrival of the new management team, headed by Will Wyatt."

According to FE Analytics, the trust has been a bottom-quartile performer in the IT Global Growth sector over the last three and five years, underperforming its benchmark – the FTSE All Share – on both occasions.

However, the trust's management team saw a massive overhaul in the summer of 2010, and Wyatt, who had previously worked on the trust’s investment team, took over as chief executive.

Since then Caledonia’s performance has improved. Over the last year the closed-ended fund has returned 23.34 per cent while the sector is up 13.03 per cent, making it a top-quartile performer.

Caledonia also beat its benchmark by 9.18 percentage points over the period.

Performance of trust vs sector and index over 1-yr

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Source: FE Analytics

Stephen King, finance director at Caledonia Investments, is pleased with the trust’s improved performance, but he expects it to remain on a discount for the foreseeable future.

"I think our trust will always have a discount, but I think it will certainly narrow form where it is," he said. "We are unlike other trusts as we have a large single shareholder – the Cayzer family – which dissuades many investors."

"Our five-year performance has not been good, but we have made changes and because of this our returns have increased. However, investors will rightly say 'let’s see what you can do', as they will need a longer track record."

Another reason why King does not think the trust will ever trade at a premium is because it invests in relatively unknown areas of the market.

"We hold a lot of unquoted companies compared to most other trusts, these make up about 40 per cent of the portfolio," he said.

"They are not the most liquid of investments and you tend to see quite lumpy returns because of it."

However, King says that investing in unquoted companies is a major part of the trust’s investment style: "We are long-term investors and in order to make a profit we want to support a company and make it grow. For instance we have held our largest holding – Close Brothers – for nearly 30 years."

"We do not implement any gearing in the trust and we don’t like investing in highly leveraged companies. The companies we like have a strong market share and have chunky assets behind them, so basically have a reason to exist."

"The private equity model to gear up on a very high percentage worked very well before the mess in 2008. However, now debt isn’t freely available so we don’t want to be stressed about debt payment and constantly looking over our shoulder."

"The companies we look towards are in need of capital and don’t or can’t go to the banks and don’t want the inquisition of private equity firms."

Elliott likes Caledonia’s investment style and says this strategy has worked well for it recently.

"Their exposure to unquoted companies is something to be wary of, but certainly not something to be worried about. This isn’t a market proxy, but they have proven their ability to take on companies and while supporting them they have made a lot of money."

"It shouldn’t be confused with a private equity trust, they are very long-term investors and because of their track record, companies actually seek them out for support."

"It isn’t your classic buy-out scheme where they leverage like crazy and sell when the price rises; they may hold a company for years or frankly decades."

"They recently sold a long-term holding of theirs – Celerant Consulting – to Hitachi and made two-and-a-half times the amount of cash they originally invested," he added.

Caledonia Investments has an ongoing charges figure of 1.01 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.