The discount is currently protected at 10 per cent, but Scouller says this is out of key with the current trend towards tight discounts in the market, making action to narrow the discount likely.
In the meantime the maturity of the trust’s private equity portfolio is likely to give a boost to NAV and lift the share price, he adds.
“We question whether the 10 per cent discount policy is appropriate in today’s world of relatively narrow investment trust discounts,” Scouller said.
“Whilst a zero discount policy would probably be difficult to achieve immediately, we think a step-change in the discount target from 10 per cent to 5 per cent seems a reasonable short term aspiration.”
Jeremy Tigue is standing down as manager of the trust from 1 July after 17 years at the helm of the portfolio. Paul Niven, current head of multi-asset investing at F&C will take over.
The trust lagged its peers for a number of years in both NAV and share price performance, although both began to pick up last year.
The portfolio is behind its index and benchmark on a five year view, having returned 84.21 per cent to shareholders as the average fund in the global growth sector has made 108.72 per cent.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
However, returns in 2013 were much better, with the share price and NAV rising in line with the benchmark, while Scouller says the private equity portfolio should give a boost to relative outperformance.
Performance of trust vs sector and index in 2013
Source: FE Analytics
“Performance was good over 2013, with the NAV total return rising strongly by 21.4 per cent, which was just ahead of the benchmark return of 21.0 per cent,” Scouller said.
“These high returns were achieved despite a significant lag in the return from the private equity portfolio, which only rose 8.2 per cent.”
“Given this portfolio is now relatively mature, we think the harvesting of investments should continue to be helpful with gains over the first half of 2014. Relative to the international trust peer group, we think the shares offer good value on a 10 per cent discount and if there is a change in the discount target from 10 per cent to 5 per cent, this would be icing on the cake.”
The fund has 19.43 per cent in the US, 21.08 per cent in the UK and 14.28 per cent in private equity.
Europe makes up a further 10.98 per cent of the portfolio and the portfolio has smaller allocations to emerging markets and Japan.
The biggest single stock holding is the 2.2 per cent of the portfolio in the private equity Pantheon Europe Fund V and the fund also has 1.8 per cent in HarbourVest V Direct Fund. BP makes up 1.5 per cent of the portfolio and Doverstreet VII 1.4 per cent.
Glaxo, Shell, HSBC and Utilico Emerging Markets also appear in the top 10.
Scouller says that he doesn’t expect any sudden change to the make-up or approach of the portfolio under the new manager.
“Our initial reaction to Paul’s appointment was that it was a signal that the board and manager wanted to take an increasingly multi-asset and multi-manager approach to the portfolio,” he said.
“However, we believe Paul’s starting point will be to have a fairly thorough discussion with the board on the options, before making any major decisions.”
“Given Paul has already been involved in the asset allocation strategy in recent years, we expect any change to be gradual and introduced in a relatively controlled manner, rather than with a revolutionary change.”
However, he does say that the trust could well continue its drift away from the UK: at the end of 2012 UK stocks made up 30 per cent of the portfolio and Scouller foresees this shifting down to below 15 per cent.
Foreign & Colonial is a trust with a long history of dividend growth, having increased its payout every year since 1970. It currently yields 2.5 per cent.
However, the dividend hasn’t been fully covered in recent years – it was covered 0.85 times last year. Scouller says the revenue reserves should be enough to allow the board to continue this policy.
“Whilst we are wary of investment trusts which do not fully cover their dividends by EPS, we do understand the approach at F&CIT, where the trust benefits from its long history which has resulted in the accumulation of significant revenue reserves,” he said.
“At 31 December 2013, revenue reserves totalled 12.5p per share after deducting the final dividend for that financial year and this is well above the board’s target of having the total cost of one year’s dividend in reserve (i.e. 9.0p).”
“In deciding on the level of dividend, the board are taking into account the fact that as the private equity portfolio is realised, cash can be reinvested in equities which are higher yielding than ‘non-yielding’ private equity investments.”
“In addition, after December 2014, there will be an annual saving of £12.4m, as a result of no further need to pay Debenture interest.”
“For the year to 31 December 2014, the board has forecast a total dividend of 9.3p, an increase of 3.3 per cent. We do expect the new manager to aim to have a portfolio which is capable of delivering continuing dividend growth in the future.”
Foreign & Colonial has ongoing charges of 0.51 per cent.
