F&C Managed Portfolio Trust — Celebrating 10 years since launch

The sterling performance of both UK and global equities (ex-UK) is shown in Exhibit 3 (left-hand side). Over the last 10 years, overseas equities have significantly outpaced the returns from UK equities. After a particularly benign period during 2017, global stock markets are experiencing much higher levels of volatility so far in 2018, as investors focus on an outlook for higher interest rates, the risk of slowing global trade due to potential US tariffs, and ongoing geopolitical tensions; this environment could continue throughout the year. As witnessed in Q118 company reports and outlook statements, corporate earnings growth remains supportive, although equity valuations for both UK and world equities are generally above their 10-year averages (Exhibit 3, right-hand side). Taking this backdrop into consideration, investors seeking equity exposure may wish to consider a fund with broad global coverage and a long-term focus, which offers the opportunity to emphasise either capital growth or income.

FMPT was launched on 16 April 2008, and since then has been managed by Peter Hewitt, at F&C (a wholly owned subsidiary of Bank of Montreal). FMPI offers the potential for long-term capital and income growth, while FMPG aims to generate long-term capital growth. The trust has a unique feature – any income generated by FMPG is transferred to FMPI in exchange for an equal amount of capital, thus boosting the income potential for FMPI and the capital growth potential for FMPG. FMPT launched with assets under management of £42m and c 2,000 shareholders; combined assets have grown to c £130m and the trust now has more than 14,000 shareholders. Both FMPI and FMPG offer investors a broad spread of investment companies, diversified by geography, sector and investment managers, which spreads investment risk. They are benchmarked against the FTSE All-Share index and both portfolios have outperformed the benchmark over three and 10 years, while FMPG has also outperformed over one and five years. Each portfolio contains at least 25 investment companies (typically c 40), which are primarily invested in equities. There are no geographic or sector restrictions, but there is a limit of 15% in a single holding, at the time of investment. The manager may invest in other funds managed by the F&C Group, up to a maximum of 20% of total assets in each portfolio. Derivatives are permitted for efficient portfolio management, including protection during periods of stock market weakness. Gearing of up to 20% of total assets is permitted in each portfolio; at end-April 2018, FMPI had net gearing of 3.6% and FMPG had a net cash position of 4.4%. On 1 February 2018, both portfolios changed their AIC classification to the Flexible Investment sector – FMPI from the Global Equity Income sector and FMPG from the Global sector. While FMPT has a unique structure, the manager considers the new peer group more relevant for both portfolios.

While equity valuation multiples have expanded, Hewitt believes that share prices can be supported by robust corporate earnings growth. For the UK in 2018, he expects a modest either positive or negative return rather than a significant rise or fall in the stock market. He notes the tension between the potential for higher interest rates against an environment of strong dividend and earnings growth. The manager believes that sterling looks close to fair value. He suggests that in the near term the currency could strengthen on the back of less uncertainty regarding Brexit negotations, but longer term he believes that overseas equities should generate higher equity returns for a sterling-based investor. Hewitt’s current preferred regions for investment are Asia Pacific and emerging markets; he suggests that while economic and corporate data in Europe are encouraging, the stock market is not fully reflecting this. In aggregate, he considers US equities to be expensive, but there are some sectors of the market experiencing very robust growth, aided by the recent tax reforms. Hence, he is not expecting a bear market in the US, although he believes that a pullback in the stock market is a possibility. Given the positive re-rating of equities, the manager expects the US stock market to be driven by earnings growth rather than by a further uplift in valuation multiples, especially as bond yields and interest rates are rising.

While global stock markets are experiencing higher levels of volatility compared to the below-average levels seen in 2017, Hewitt is continuing to focus on his favoured areas, such as technology and biotech, which he believes have secular growth characteristics. The technology sector has outperformed the broader market, but Hewitt believes that strong earnings growth and share price momentum will continue. He also points to positive fundamentals within the biotech industry, coupled with attractive company valuations, and believes that increased mergers and acquisitions could lead to a positive re-rating in the sector. While the manager takes the macro environment into account, he is keen to stress that all investments are made on a bottom-up basis and he is expecting strong performance from the portfolio’s holdings.

Hewitt invests for the long term, aiming to grow both capital and income, while protecting capital when stock markets are less buoyant. Both FMPI and FMPG have a number of more defensive positions. The manager adopts a bottom-up focus to stock selection, seeking holdings with an ability to outperform their respective benchmarks as well as the FTSE All-Share index. Meeting investment company managements is a key part of the investment process supplemented by the use of third-party research. Over time, UK exposure has been reduced in both portfolios in favour of overseas equities, which the manager believes offer the potential for better long-term total returns. He also favours sectors with secular growth characteristics, such as technology and biotech.

FMPI: Monks Investment Trust is a new position in FMPI (already the largest position in FMPG), bought with the proceeds of the large special dividend received from 3i Infrastructure. Hewitt believes Monks offers good global exposure, including a large weighting to the technology sector, offering the prospect of higher capital growth for the income portfolio. Another new holding in FMPI is Assura, which is a specialist property vehicle investing in GP surgeries across the UK. It enters into long-term contracts, a number of which are index-linked and backed by the government. Assura offers a dividend yield of more than 4%, and the annual payout is covered by income and growing at a high single-digit annual rate. Recent sales in FMPI are: City Merchants High Yield Trust and Edinburgh Investment Trust (UK Equity Income sector); Aberdeen Asian Smaller Companies Convertible Loan Stock (Asia Pacific ex-Japan); BlackRock North American Income Trust (North America); and Carador Income (Sector Specialist: Debt).

FMPG: the only new position in FMPG in recent months is Capital Gearing Trust. It is a very defensive fund, aiming to both grow and preserve capital. It has c 40% in equities and positions in preference shares/corporate debt, government bonds, gold and cash. Hewitt believes it is important to have some defensive holdings in the portfolio to offer protection in periods of stock market weakness, particularly given the duration of the stock market rally following the global financial crisis. The manager has also added to defensive positions in Personal Assets Trust and Ruffer Investment Company. Recent sales in FMPG are: Perpetual Income & Growth Trust (UK Equity Income); Sanditon Investment Trust (UK All Companies); Fundsmith Emerging Equities Trust (Global Emerging Markets); and Gabelli Value Plus Trust (North America).

FMPI: in H118 (ending 30 November 2017), FMPI’s NAV and share price total returns of +2.0% and +1.1% respectively were ahead of the benchmark’s -0.2% total return. The best contributors to performance were: BB Biotech (+15%) and CC Japan Income and Growth Trust (+15%), while the largest detractor was Edinburgh Investment Trust (-8%).

FMPI’s relative performance is shown in Exhibit 6. Its NAV total return has outperformed the benchmark over three and 10 years, but has underperformed over one and five years.

FMPG: in H118 (ending 30 November 2017), FMPI’s NAV and share price total returns of +6.3% and +5.8% respectively were meaningfully ahead of the benchmark’s -0.2% total return. Two of the best contributors to performance were: Baillie Gifford Japan Trust (+27%) and Syncona (+24%), while the largest detractor was Woodford Patient Capital Trust (-9%).

FMPG’s relative performance is shown in Exhibit 9. It has outperformed the benchmark over one, three, five and 10 years in both NAV and share price terms.

FMPT’s board aims to ensure that FMPI’s and FMPG’s shares trade close to NAV. FMPI’s current 3.0% share price premium to cum-income NAV compares to the average premiums of the last one, three, five and 10 years of 1.7%, 0.9%, 0.9% and 0.2% respectively.

FMPG’s current 1.6% share price premium to cum-income NAV compares to the average premiums of the last one, three and five years of 1.2%, 0.6% and 0.3% respectively and the average 10-year discount of 0.2%.

At 14 May 2018, FMPI had 43.1m and FMPG had 35.2m ordinary shares in issue; no shares are currently held in treasury. FMPT has a £5m five-year loan facility at a fixed rate of 2.03% and a £2m two-year unsecured revolving credit facility with Royal Bank of Scotland. Gearing of up to 20% of total assets is permitted in both portfolios; at end-April 2018, FMPI had 3.6% net gearing and FMPG had a 4.4% net cash position.

F&C is paid an annual management fee of 0.650% pa of total assets in each portfolio, reducing to 0.325% pa on any F&C-managed investments held. The management fee is split 60:40 between capital and revenue for FMPI and 80:20 respectively for FMPG. A 10% performance fee is payable on the excess total return of FMPI and FMPG versus the benchmark total return, capped at 0.35% of the total assets of the relevant portfolio. FMPI’s ongoing charge in FY17 was 1.12% (3bp higher versus FY16) while FMPG’s ongoing charge was 1.08% (1bp lower versus FY16).

Annually in October, shareholders have the opportunity to convert their income shares into growth shares and vice versa. This is subject to certain minimum and maximum thresholds; so far there have been no conversions as the minimum limit has not been achieved.

All income accrues to FMPI, with any net revenue generated by FMPG passing to FMPI in exchange for an equal amount of capital. FMPI pays dividends four times a year, in October, January, April and July. The 5.45p FY17 total dividend was an increase of 4.8% compared with the FY16 distribution; this is above the five-year annual compound growth rate of 3.9%. In line with FY16, the FY17 dividend was 1.08x covered by income. At the end of H118, the revenue reserve was c £1.4m, which was equivalent to c 0.6x the FY17 total dividend, providing a buffer for any periods of lower portfolio income in future years.

So far in FY18, FMPI has declared three interim dividends of 1.30p; the fourth interim dividend will be dependent on the level of income generated during the financial year. FMPI’s current dividend yield of 4.0% compares favourably with the UK stock market and the majority of its peers in the AIC Flexible Investment sector (see Exhibit 13).

On 1 February 2018, FMPI and FMPG were both reclassified within the AIC Flexible Investment sector from the AIC Global Equity Income and Global sectors respectively. The manager believes that this is a more relevant sector for the portfolios as they have a very wide mandate, with an ability to adopt a more aggressive or defensive position when required.

In Exhibit 13 we highlight all the funds in the Flexible Investment sector with track records longer than one year, remaining mindful that the peers have a broad range of mandates. FMPI’s NAV total return is above average over one, five and 10 years, while lagging over three years. FMPG’s NAV total return is meaningfully above average over all periods shown, ranking first, fifth and fourth out of 17 funds over one, three and five years respectively, and third out of 16 funds over 10 years. FMPI and FMPG are currently both trading at a premium, unlike some of the peers that are trading on large discounts. Their ongoing charges are modestly lower than average. FMPI’s dividend yield is the fourth highest in the group, which is helped by the income transfer from FMPG.

FMPT’s board comprises four non-executive, independent directors, all of whom were appointed on 22 February 2008, shortly before the trust’s launch on 16 April that year. Richard Martin is chairman of the board and the nomination committee. He is an adviser to several family groups and a member of the board of Aurora Investment Trust. Martin was formerly chairman of the investment committee of the National Trust for Scotland. David Harris is the senior independent director. He is CEO of specialist investment and marketing consultancy group, InvaTrust Consultancy, which focuses on the investment fund management industry. Harris is currently a member of the board of The Character Group, Aseana Properties, Small Companies Dividend Trust, Manchester and London Investment Trust and SDF Productions. Colin McGill is chairman of the audit committee, and a qualified lawyer and accountant. He was CEO of Sportech, employed at the Bank of Scotland and chief executive of the corporate division of the Bank of Scotland. Alistair Stewart is chairman of the remuneration committee. He is a chartered accountant, has served as a director at Murray Johnstone (investment managers) and was head of research at private client stockbrokers Speirs & Jeffrey.