The £1.3bn Caledonia Investment Trust offers “significant value” for long-term investors on its current double-digit discount, according to Numis Securities, which rates the trust as a core holding due to its global remit, new strategy and proven management team.
Though there has been a general tightening of discounts across the various investment trust sectors over recent years due to a greater appetite for risk among investors, the retail distribution review and a greater emphasis on discount control mechanisms from boards, that trend has started to reverse in 2015.
While it has largely been the case in the UK sectors, as FE Trustnet has highlighted in recent articles, other investment trusts have also seen their discounts widen over recent months.
One of which is the Caledonia Investment Trust, which sits in the IT Global sector, as its discount to NAV has moved out to close to 20 per cent, having traded on a discount of 12 per cent at points over the past 12 months.
Trust’s discount over the 5yrs
Source: FE Analytics
While the closed-ended fund has struggled over the longer term, its new manager Will Wyatt implemented a clearer investment process, which splits the portfolio into four distinct ‘pools’. This has meant shareholders have seen a reversal in fortunes over recent years.
As a result, Numis says the current discount is very attractive. While its share price is never likely to move onto a premium given it is 48 per cent owned by the Cayzer family, the broker says there is certainly scope for it to narrow considerably from these levels.
“We believe that Caledonia now has a clear strategy to deliver strong long-term performance in both absolute terms and relative to equity market indices,” Numis said.
“The investment process through the four pools is far more rigorous than in the past, in our view, and this is starting to be reflected in performance. The share price is up 20p (0.8 per cent) today as the NAV was stronger than expected, boosted by a revaluation of unquoted investments.”
“However, Caledonia is still trading on a discount of c.19 per cent (versus a peer group average of 5 per cent). In part, we believe this reflects the fund’s substantial exposure to unquoted assets and the portfolio cannot be expected to perform in-line with markets.”
The team added: “However, we believe that Caledonia offers significant value for long-term investors on its current discount.”
Wyatt assumed responsibility of the trust in July 2010 and made changes to its strategy such as splitting its assets into four pools (namely quoted, unquoted, funds and income and growth) and making the portfolio more concentrated.
While the changes took time to implement, they have since been successful. According to FE Analytics the trust has returned 102.94 per cent over three years, meaning it has beaten the IT Global sector average by 47.04 percentage points and has more than doubled the gains of its FTSE All Share benchmark.
Performance of trust versus sector and index over 3yrs
Source: FE Analytics
While the closed-ended fund is still outperforming over 12 months with returns of 14.06 per cent, its recently widening discount means it is lagging relative to both its sector and benchmark year-to-date.
In terms of current positioning, the team at Caledonia currently holds 28 per cent in quoted stocks, which include the likes of AG Barr and Close Brothers, and 31 per cent unquoted companies such as Park Holidays and Bowers & Wilkins.
It then holds 20 per cent in funds that tend to be more specialised investment trusts like Chinese private equity fund Capital Today China and Perlus Micro Cap fund, which invests in the bottom end of the North American listed market – though it also holds the Newton Asian Income fund lower down the portfolio.
The final pool, income and growth, accounts for 13 per cent of Caledonia’s assets and is primarily made up of “global blue chip companies with strong balance sheets, above average returns and demonstrable histories of creating shareholder value”.
Wyatt also holds 8 per cent of the portfolio in the money market as he thinks it is “prudent at this stage of the stock market cycle to have a cushion of cash … to take advantage of opportunities as they present themselves”.
Apart from its more balanced portfolio, the team at Numis rates the trust due to the board’s long-term commitment to its progressive dividend policy.
“The final dividend of 36.8p (to be paid 6 August) brings the total annual dividend to 50.6p, which represents an increase of 3.1 per cent, supported by strong portfolio income during the period of £47.2m, up 15 per cent from the previous year,” Numis said.
“Caledonia yields 2.1 per cent based on the current share price and it is notable that the fund charges all of its management and interest expenses to the revenue account, unlike its global equity peers. Furthermore, the dividend has increased for 48 consecutive years.”
Trust’s dividend history
Source: Caledonia Investments
The fact that the trust has increased its pay-out in each year for nearly five decades places Caledonia on the AIC’s list of ‘dividend heroes’. Only City of London Investment Trust, Bankers IT and Alliance Trust have longer track records of increasing their income distributions.
The trust’s dividend was 19.5p per share 10 years ago, meaning the board have increased their pay-out by 83 per cent as of last years’ final dividend.
Caledonia IT isn’t geared and has ongoing charges of 1.03 per cent.