Paul Niven F&C Interview

Paul Niven F&C Interview
We chat to the manager of the dividend stalwart.
David Kimberley
August 20, 2021

Founded way back in 1868, the F&C investment trust has long been a dividend stalwart for income investors. Managed by Paul Niven, the trust has paid dividends every year since its founding and has increased payouts for the past 51 consecutive years.

To get an idea of how the trust makes that happen, Freetrade Senior Analyst Dan Lane sat down with Paul earlier this month to discuss investment strategies, US stocks, F&C's structure, and some of the recent events in China.

You can watch the interview below or read the transcript.

Dan Lane: Hello and welcome to this fund manager interview here at Freetrade today. I'm joined by F&C manager Paul Niven to talk about the trust and give investors a little bit of an idea of what they're doing over at F&C. 

If you haven't signed up to Honey, our daily market newsletter, be sure to do that in the link below for daily news on the markets every single day of the week. With that, thanks so much for joining us Paul. I thought we could start off by talking about the trust in general. What are you trying to achieve over at F&C?

Paul Niven: So the overriding objective of our trust is to deliver growth in both our long term capital and also income for shareholders. We’re a one stop shop for investors looking for exposure to both public and private equity assets. So today we have 90 percent of our portfolio in listed equities and around 10 percent in unlisted private equity opportunities.

Dan Lane: Excellent. Yeah, you know, I think we might come back to that split later on, but I mean, initially, what does that mean that you're a growth manager, are you a value manager or a bit of both? How do you approach the market?

Paul Niven: So we adopt a diversified approach, and that means that we source and select a range of underlying investment strategies which are both global and regional in nature. Obviously, one can categorize different strategies by virtue of the growth characteristics or value but we actually have both. And one of the advantages of that is that these strategies that we have in the portfolio are differentiated against each other and that provides benefits through diversification. So having both growth, exposure and value exposure, this will enable us to smooth returns in the longer term for investors.

Dan Lane: And I think looking at the holdings, I mean, it's quite fun to look at them because you've got the big names in there and I think the top five or six, I mean, there's a lot of tech exposure, but then you get names like International Flavors and Fragrances, and that's slightly different from your Apples and your Facebooks. But how do you decide which companies make it in?

Paul Niven: The process that I'm responsible for is overall portfolio composition, and that is selecting underlying strategies and managing that exposure. Underlying stock selection decisions are undertaken by specialists either within the group or, in a few instances, by a third party manager, where we essentially give a portion of capital to a specialist manager to undertake stock selection. 

And that is the case in the US, for example, where we employ T. Rowe Price to select growth stocks for us, a Baltimore-based manager, and Barrow Hanley based in Dallas. And they select some of these value names for us. Obviously, we're lowly weighted, perhaps slightly more slowly growing, but attractive….attractively valued to fundamentals. 

Just very briefly, on international Flavors and Fragrances, it is an interesting name that is perhaps less familiar than some of those big disruptors, which you mentioned, but we actually hold that in a couple of areas in the portfolio. So it does appear quite high up in the overall list of the list of names that we hold. And that stands to benefit from long term health and wellbeing trends related to nutrition, which are being well supported by both regulation and also consumer demand. Those shares traded at a discount to peers in the space and we think offer a very attractive valuation [and] a decent margin of safety.

Dan Lane: And I was going to ask you about, you know, do you have a specific stock that tells a story of how you run things? It seems to me they are quite important facets to things like margins of safety, decent valuation, exposure and so on.

Paul Niven: Absolutely. Well, I think in reality, when you look at our portfolio, you will see a range of stocks from those big names like Apple and Amazon through to perhaps less familiar names. 

And each manager of the underlying portfolio level will be looking for slightly different attributes. But we like that, as I said, diversifying approach so long as managers have skill that will add to returns and reduce risk. And there's more than one way, essentially, to be right. One wouldn't want to be too dogmatic about precisely what one is looking for in aggregate. 

But that said, each manager does something quite specific. But what I would say is in general, we are looking for companies which are ticking a number of boxes — attractively valued relative to fundamentals, strong competitive market position versus their peers and also with strong management. 

And depending on the strategy, the emphasis will change. So, again, a growth manager will be looking for placing more emphasis in terms of growth rates in revenues or cash flows, whereas others will tend to come back to this profit margin of safety, will be a little bit more value-oriented and looking for companies which might be a bit slower growth in terms of fundamentals, but are perhaps mispriced. 

And another angle, which is of increasing importance, is the responsible angle. So we seek to be responsible investors. The primary way in which we achieve this is through engagement, but there are some areas we will not invest in. So think about stocks that we will invest in, but also areas we won’t invest. And so we won’t invest in areas such as thermal coal, because of climate considerations, controversial weapons, and also tobacco.

Dan Lane: Just on that sustainability angle, I mean, I think I think people see that if you have an ESG element to your investment strategy, it's nearly like you're some kind of tree hugger. But sustainability is just about sustainability of returns as well and flourishing industries.

Paul Niven: Absolutely, I mean, sustainable business practices tend to be good business practices and businesses which act responsibly tend to have higher quality metrics, whether it is labor standards, environmental considerations, and actually in many instances that leads to better shareholder returns. 

So there's a quite high correlation, actually, between the notion of investing for good and investing responsibly and this notion of quality in high quality businesses. High quality businesses do tend to consider those aspects, which are really very important from a responsible angle. What I would say, in just going back to this point, there's a continuum, as it were, in terms of responsible investing. And from our perspective, we do have some components in the strategy which are explicitly focusing on sustainable outcomes and really good business practices. 

Companies that are well aligned to UN Sustainable Development Goals and essentially doing good. More broadly we do take our responsibilities in terms of voting and engagement really seriously, and you look at our portfolio and the metrics in terms of alignment to carbon, for example, we make a zero commitment. I will engage with companies in order to deliver a better outcome for shareholders through better business practices. And considering those broader metrics which I mentioned, such as the environment.

Dan Lane: Great to hear. And I think you mentioned the US exposure through T. Rowe Price and on the growth stocks that, you know, is not the only geography represented in the portfolio. Are there any other geographies you're particularly drawn to? And maybe you could give us a view as to your view on China at the moment. There's so much exciting stuff in the past few days that's come out about what's happening there.

Paul Niven: Yes, it's really interesting because if you look at the aggregate portfolio, there's 60 percent of the portfolio invested actually into US listed companies that would just add to the listed exposure. And there's a little bit less than that if you incorporate private market exposure. 

But the majority of our holdings actually have a US listing. Next biggest area for us is going to be Europe and we obviously have exposure to other areas like Japan, emerging markets. So we think there's there's good opportunities everywhere. The US has been an area that has notably outperformed for the last decade or more, and that people talk about valuations on US markets and obviously they trade at a premium. 

But the reason there is a premium is partly to do with the superior earnings growth that's been delivered from that area, the high margins for many of the leading companies in that space. So it's treated richly, but for good reason because of the very strong fundamentals. 

But there are other interesting opportunities outside of the US. You mentioned China. What I would say on China is China's and an area of increasing importance. Obviously, from an economic and a macro perspective it constitutes a large and increasing portion of the global economy. And an even larger part of the global growth picture is also becoming more and more important in terms of listed markets. However, one has to exercise an element of caution clearly with regard to the regulatory backdrop. 

And obviously there's been, and not just in the last few days, but over recent months. And even looking back into last year, there have been some warning signs that perhaps China is becoming a little bit less tolerant of some of the practices of some of the businesses which are either looking to list or are already listed and indeed some of the individuals involved in running those businesses. 

So it is concerning is what I would say. I don't think it is going to derail the growth in China in terms of importance. From a broader market perspective, it is already bigger than the UK in global market indices, right, and it is fast closing in on Japan.

Dan Lane: The chatter seems to have flitted from the US tech maybe earlier in the year to kind of lowly valued UK companies. And I guess this maybe suits your style because you've got those growth elements and value elements that they've been handing the baton in Q1 and Q2. But I think in all of this, Europe is being largely ignored. But you do have European exposure. And what's your thesis there?

Paul Niven: It has been a pure grower in terms of the region more broadly, and the corporate sector has lagged quite materially behind in terms of growth and in earnings from a generalised perspective. 

I think if you take a step back and think about the environment that we are in, it’s one whereby the global growth momentum is accelerating. Growth is more abundant globally than it was 12 months ago. It wasn't that long ago that we were really concerned about what 2021 was almost going to look like from a growth perspective. And growth is much more abundant. It's been tremendous upward revisions and that reflationary environment, which has largely played out over the last nine to 12 months, albeit the last few weeks or so, has taken a bit of a breather. 

That's an environment which actually should be a bit more conducive to European equity performance. And there's some glimmers that we're beginning to see that actually in 2021. So what was the thesis for European equities? 

Well, firstly, Europe trades at quite a material valuation discount to the US. And partly that is due to this fact that the US has delivered just far superior outcomes in terms of earnings growth than has Europe. The composition of the European market is, in broad terms, a bit more cyclical than what you tend to see in the US. What I mean by that is it's a little bit more geared to the economic cycle and therefore you're thinking there's an upswing, you get a bit more leverage to that. And that's to do with the financial sector. 

So the European financial sector and the banking sector didn't really clean itself up or was not cleaned up in the way that the US was, and therefore it has lingering issues. But nonetheless, if we're in an environment where inflation expectations are rising, we're pulling to backing up somewhat with growth, expectations are rising, that actually it has to be a relatively good environment for financials and one in which Europe would also tend to perform a bit better, so we do have reasonable exposure to Europe. 

I tend to think my view is that the performance in equities is going to be more balanced going forward than what people have been used to in the last few years, where it was all about the US, all about disruptive tech.

Dan Lane: So Paul turning to the trust itself, it's probably fair to say that we probably wouldn't have investment funds at all without F&C. I think I read somewhere that the trust came along before zip fasteners and came in just in time for traffic lights and things. And how important is that trust structure in what you're trying to do? I think you mentioned access to private equity as well.

Paul Niven: The structure of the trust is really important. And the trust was launched 1868, so it's been around for 150 years. And one of the reasons that the trust has survived for as long as it has is really the robustness of that closed-ended structure and the benefits which that actually confers for shareholders. So it's really, really important. 

I think being a closed-ended fund, we don't have to deal with daily inflows, net flows. And that means that we can invest with a long term perspective and also take illiquidity on the portfolio, which means we can buy less liquid assets like private equity capital on a multi-year basis. 

We can also borrow to invest. So as a company, a listed company, we can undertake long term borrowings, and we recently undertook some long-dated [borrowing] for 35 years at very, very attractive rates of interest and blended rates on that borrowing that we recently undertook, of 2.2%. So if we can make an excess return above the 2% or thereabouts, it is going to enhance returns for our shareholders over a very long time period. 

We also, and this is really important, put some of our income into revenue reserves in the good times, and that helps to smooth dividends. So we've got very substantial revenue reserves and that has enabled us to pay a dividend every single year since 1868 and also a rising dividend to shareholders for 51 consecutive years. 

If you think about….last year's one example, big, big downturn, collapse in earnings, collapse in dividend payments, and yet the trust managed to pay a rising dividend to shareholders. That's a function of the revenue reserve that we have in place, which enables us to smooth income for our shareholders. 

And the final point I'd make is, again, it is very important as a listed company, and we sit just outside the largest 100 UK listed firms, we have an independent board of directors and we look after the interests of shareholders. So they do the right thing from a shareholder perspective and ensure that the company is delivering attractive returns.

Dan Lane: Yeah, you know, I think that income aspect is extremely important when you're a fully paid up member of the dividend heroes and just thinking about that and thinking about, I mean, you mentioned the accessibility of that long term capital. And I would imagine that's to perform something that investors might know as gearing, where you can invest more and try and amplify returns….of course it can go the other way and amplify losses, which you never want it to. But some of the aspects of trusts, people really aren't sure of. And I think there's a couple of facets there, especially the income, which would lend themselves to certain types of shareholders with certain types of aims. Who do you think will be attracted to a trust like F&C?

Paul Niven: It's a really good question. So our exposure, as I said, is diversified as global in nature, its growth assets listed and private equity. So the short answer is, if investors are looking for diversified exposure to growth assets and what we would expect, certainly from our perspective, attractive returns on a long-term basis from listed equity and private equity. 

But the way in which we invest in that diversified nature means that we're ideal in terms of providing a cornerstone to a portfolio. Again, we don't place too much risk in one particular area, and that means the bedrock of the portfolio of growth assets. 

We think we can fulfill a very useful role at this point on income where we're not high income trusts — our dividend yield is 1.5% or thereabout— with this ability to deliver not only dividends, at least historically, every year since launch with 51 consecutive rises and the prospect of capital growth as well means, I think, it’s a very attractive proposition for those investors who are looking for a growing income through time and are looking also to have some return on their capital.

Dan Lane: You know, a really useful insight into the trust. Thanks for joining us. I'm looking forward to talking to you again in another 150 years. And thank you very much for watching. Again, if you want to find out more about F&C or any other trusts on the platform, visit the app. And don't forget to sign up to Honey, our daily market newsletter, for more news from the markets every day. Thanks for joining.

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